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BSOP 209 Week 3 Assignment Answer

The document presents information on two proposals to increase manufacturing capacity by adding new equipment. Proposal A has fixed costs of $50,000 and variable costs of $12 per unit, while Proposal B has fixed costs of $70,000 and variable costs of $10 per unit. Both generate $20 in revenue per unit. It then calculates the break-even points in units for each proposal and the effect of adding $10,000 in installation costs. Additional questions calculate net present value for various investments giving annual returns over 5-8 years at interest rates of 10-12%.

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Eslam Sabry
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398 views2 pages

BSOP 209 Week 3 Assignment Answer

The document presents information on two proposals to increase manufacturing capacity by adding new equipment. Proposal A has fixed costs of $50,000 and variable costs of $12 per unit, while Proposal B has fixed costs of $70,000 and variable costs of $10 per unit. Both generate $20 in revenue per unit. It then calculates the break-even points in units for each proposal and the effect of adding $10,000 in installation costs. Additional questions calculate net present value for various investments giving annual returns over 5-8 years at interest rates of 10-12%.

Uploaded by

Eslam Sabry
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

S7.

17
Markland Manufacturing intends to increase capacity by overcoming a bottleneck operation
by adding new equipment. Two vendors have presented proposals. The fixed costs for
proposal A are $50,000, and for proposal B, $70,000. The variable cost for A is $12.00, and
for B, $10.00. The revenue generated by each unit is $20.00.
a) What is the break-even point in units for proposal A?
Ans:
The break-even point in units for proposal A is:
BEP (x) = F/ (P-V) = $50000 /($20-$12) = 50000/8 = 6250 Units
b) What is the break-even point in units for proposal B?
Ans:
The break-even point in units for proposal B is:
BEP (x) = F/ (P-V) = $70000 /($20-$10) = 70000/10 = 7000 Units

S7.18
Using the data in Problem S7.17:
a) What is the break-even point in dollars for proposal A if you add $10,000 installation to
the fixed cost?
Ans:
The break-even point in Dollar for proposal A is:
BEP (s) = F/ (1-(V/P)) = 60000 /(1- (12/20)) = 60000 /0.4 = $ 150,000

b) What is the break-even point in dollars for proposal B if you add $10,000 installation to
the fixed cost?
Ans:
The break-even point in Dollar for proposal B is:
BEP (s) = F/ (1-(V/P)) = 80000 /(1- (10/20)) = 80000 /0.5 = $ 160,000

S7.30
What is the net present value of an investment that costs $75,000 and has a salvage value of
$45,000? The annual profit from the investment is $15,000 each year for 5 years. The cost of
capital at this risk level is 12%.
Ans:
Initial investment = $75,000
Salvage value = $45,000
Five-year return = $15,000
Cost of capital = 12%
NPV annuity factor → 5 years @ 12% = 3.605 (As per the TABLE S7.2 in the Textbook
-Present Value of an Annuity of $1)

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Present value = 3.605 × 15,000 = $54,075
(TABLE S7.1 in the Textbook - Present Value of a $1 –> 5 Years @ 12 % = 0.567)
Present value of salvage: 0.567 × 45,000 = $25,515
Net present value = 54,075 + 25,515 – 75,000 = $4,590

S7.31
The initial cost of an investment is $65,000 and the cost of capital is 10%. The return is
$16,000 per year for 8 years. What is the net present value?
Ans:
Initial investment = $65,000
Eight-year return = $16,000 per year
Cost of capital = 10%
NPV annuity factor → 8 years @ 10% = 5.335 (As per the TABLE S7.2 in the Textbook
-Present Value of an Annuity of $1)
Present value = 5.335 × $16,000 = $85,360
Net present value = $85,360 – $65,000 = $20,360

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