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Math Help - what proposal should be accepted for a 4-year production period

  1. #1
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    what proposal should be accepted for a 4-year production period

    I was having a problem
    It is estimated that the annual sales of a new product will be 2,000 units the first year and an increase by 1000 units per year until 5,000 units are sold during the fourth year. Proposal A is to purchase equipment costing $12,000 with an estimated salvage value of $2,000 at the end of 4 years. Proposal B is to purchase equipment costing $28,000 with an estimated salvage value of $5,000 at the end of year 4. The variable cost per unit under proposal A is estimated to be $0.80, but it is estimated to be $0.25 under proposal B. If the interest rate is 9%, what proposal should be accepted for a 4-year production period?
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  2. #2
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    Missing Price Per Unit

    Quote Originally Posted by saleh123 View Post
    I was having a problem
    It is estimated that the annual sales of a new product will be 2,000 units the first year and an increase by 1000 units per year until 5,000 units are sold during the fourth year. Proposal A is to purchase equipment costing $12,000 with an estimated salvage value of $2,000 at the end of 4 years. Proposal B is to purchase equipment costing $28,000 with an estimated salvage value of $5,000 at the end of year 4. The variable cost per unit under proposal A is estimated to be $0.80, but it is estimated to be $0.25 under proposal B. If the interest rate is 9%, what proposal should be accepted for a 4-year production period?
    You didn't specify price per unit. Without which when I computed the NPV Proposal A seems to have lower cost than Proposal B
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  3. #3
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    Cost flows are :
    for A: 2000(.80) ........5000(.80) = 1600,2400,3200,4000
    for B: 2000(.25).........5000(.25) = 500, 750, 1000, 1250

    Let x = 1.09

    A: -12000 - 1600/x - 2400/x^2 - 3200/x^3 - 4000/x^4 + 2000/x^4 = ~-19376

    B: -28000 - 500/x - 750/x^2 - 1000/x^3 - 1250/x^4 + 5000/x^4 = ~-27206
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