Hemisphere Electric may purchase equipment to manufacture a new line of wireless devices for home appliance control. The first cost will be $80,000, and the life is estimated at 6 years with a salvage value of $10,000. Different people in marketing have provided revenue estimates that the devices will generate. The estimates range from a low of $10,000 to a high of $20,000, with an average of $16,000 per year. If the MARR is 8% per year, use PW to determine if these different estimates will change the decision to purchase the equipment.
What will be an ideal response?
PWlow = -80,000 + 10,000(P/F,8%,6) + 10,000(P/A,8%,6)
= -80,000 + 10,000(0.6302) + 10,000(4.6229)
= $–27,469
PWavg = -80,000 + 10,000(P/F,8%,6) + 16,000(P/A,8%,6)
= -80,000 + 10,000(0.6302) + 16,000(4.6229)
= $268
PWhigh = -80,000 + 10,000(P/F,8%,6) + 20,000(P/A,8%,6)
= -80,000 + 10,000(0.6302) + 20,000(4.6229)
= $18,760
The $10,000 revenue estimate is the only one that does not favor the purchase. The
average and high estimates do favor purchase
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