Please show steps and explain. Thank you! 6-36 An RV manufacturer estimates that
ID: 1102764 • Letter: P
Question
Please show steps and explain. Thank you!
6-36 An RV manufacturer estimates that annual profits will increase if a mobile model is built and taken to trade shows to market their product line. A finance and engineering team has looked at the issue and has developed two options: 1. A large model can be developed at a cost of $70,000, and it should increase annual profits by $30,000 per year. 2. A small model can be developed for $55,000, but it will only increase annual profits by $12,000 per year. The salvage value for the large model is $5000 more than the small model after their common useful life of 5 years, and it costs S1000 more a year to transport to the trade shows. The manufacturer uses an inter- est rate of 20%. Use an annual worth comparison to make a recommendation on which, if either, option should be chosen.Explanation / Answer
Find the annual worth of Large model = (-70000 + (30000 - 1000)(P/A, 20%, 5) + 5000(P/F, 20%, 5))(A/P, 20%, 5)
AW = (-70000 + 29000*2.9906 + 5000*0.40188)(0.3344)
= 6265.60
AW of small model =( -55000 + 12000(P/A, 20%, 5))(A/P, 20%, 5)
= (-55000 + 12000*2.9906)(0.3344)
= -6391.30
Since AW of large model is positive and greater than that of small model, we should select large model