So$,$ if JK outsourced the electric compressor, it would cut down the manufacturing cost by $$9\mathrm{.}50$ per unit. However, the company must also buy specialized inspection equipment to test the quality of the electric compressor units, since its current inspection is done during each process of manufacturing of the electric compressor, rather than on the completed part. The inspection machine costs $$325,000$ with an estimated salvage value of $$60,000$ at the end of the $7-$year useful life. The operating and maintenance cost of the inspection machine is expected to be $$120,000$ per year. The accounting department has itemized the annual costs associated with each option as follows. Assuming that JK$\text{'}$s MARR is $18\%,$ calculate the unit cost under each option

Solution

Given

Cash flows for two options and $i=18\%.$

Find

Unit cost for each option and the option preferred.

We may itemize the annual costs associated with each option as follows:

Make Option: $$270$ per unit

Buy option: The two additional cost components are capital cost and operating cost.

Capital cost:

$CR(18\%)=($$$325,000-$$$60,000)(\frac{A}{P},18\%,7)$

$+$$$60,000(0\mathrm{.}18)$

$=$$$80,326$

Calculate the capital cost by finding the capital cost for each indinvidual year? Should get the same value of $80,326$$