Question: The current output from a process is 5,000 units per week with a total unit cost of $45 each and a selling price of $54.00
The current output from a process is 5,000 units per week with a total unit cost of $45 each and a selling price of $54.00 per unit. The existing equipment cost $125,000 three years ago and it is estimated to have five years remaining. It would have no salvage value at the time. Its current operating costs are $25,000 per year including maintenance, overhead, material, and labor. A new piece of equipment for the process could be purchased for $150,000 with a 10-year life and no salvage value at that time. The comparable operating cost of the new equipment would be $20,000 per year, and the output from the new equipment would be 6,000 units per week. If the firm desires an ROI of 10%, should the new equipment be purchased if all the additional output can be sold at the current price? What if the additional output would have to be sold at a discount of $5 per unit? Should the new equipment be purchased? The current value of the old equipment is $75,000.
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