Monroe Manufacturing owns a warehouse that has been used for storing finished goods for electro-pump products. As the company is phasing out the electro-pump product line, the company is considering modifying the existing structure to use for manufacturing a new product line. Monroe's production engineer feels that the warehouse could be modified to handle one of two new product lines. The cost and revenue data for the two product alternatives arc as follows: Product A Product BInitial cash expenditure:• Warehouse modification $115,000 $189,000• Equipment $250,000 $315,000Annual revenues $215,000 $289,000Annual O&M costs $126,000 $168,000Product life 8 years 8 yearsSalvage value (equipment) $25,000 $35,000After eight years, the converted building will be too small for efficient production of either product line. At that time, Monroe plans to use it as a warehouse for storing raw materials as before. Monroe's required return on investment is 15%.Which product should be manufactured?
Monroe Manufacturing owns a warehouse that has been used for storing finished goods for electro-pump products. As the company is phasing out the electro-pump product line, the company is considering modifying the existing structure to use for manufacturing a new product line. Monroe's production engineer feels that the warehouse could be modified to handle one of two new product lines. The cost and revenue data for the two product alternatives arc as follows:
Product A Product B
Initial cash expenditure:
• Warehouse modification $115,000 $189,000
• Equipment $250,000 $315,000
Annual revenues $215,000 $289,000
Annual O&M costs $126,000 $168,000
Product life 8 years 8 years
Salvage value (equipment) $25,000 $35,000
After eight years, the converted building will be too small for efficient production of either product line. At that time, Monroe plans to use it as a warehouse for storing raw materials as before. Monroe's required return on investment is 15%.
Which product should be manufactured?
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