QUESTION 3 (100 marks) (50 marks) (a) The Great Outback Trucking Company is considering two alternative types of trucks as a replacement for a vehicle that is near the end its useful life. Truck A, the seemingly least expensive model, has an economic life of five years, an initial cost of $30,000 and an estimated trade-in value of $15,000 after its five years in service. Annual maintenance costs are $1,800 and the expected revenue from the truck is $75,000 per annum. Truck B, a faster, more powerful and larger capacity model, will have an economic life of six years, an initial cost of $70,000 and an estimated trade-in value of $20,000 after six years in service. Annual maintenance costs are $3,500 and truck B will increase revenue by $15,000 per annum over truck A. The cost of finance is 16 per cent per annum. In both cases, maintenance costs are incurred at the end of each year and revenue is also credited at that time. Using present value analysis, determine which truck the company should purchase to replace its existing vehicle. Justify your answer by showing all calculations. (b) (50 marks) The owner of a small manufacturing business has patented a new device for washing dishes and cleaning dirty kitchen sinks. Before trying to commercialize the device and add to her existing product line, she wants reasonable assurance of success. Variable costs are estimated at $7 per unit produced and sold. Fixed costs are about $56,000 per year. (i) If the selling price is at $25, how many units must be produced and sold to break even? Use both algebraic and graphical approaches. (30 marks) Forecasted sales for the first year are 10,000 units if the price is reduced to $ 15. With this pricing strategy, what would be the product's total contribution to profits in the first year? (10 marks) ENG4004 Engineering Project and Operations Management Examination Period - Semester 3, 2017 Page 5 of 9 By further reducing the selling price to $12, the forecasted sales will change to 15,000 units in the first year, does this change in price worthwhile? (10 marks)