The equipment needed to manufacture a product costs $1,000,000 to purchase.  This equipment has a life of 5 years and a salvage value of $100,000.  Fixed costs for this equipment are $50,000 per year while variable costs are $200 per unit of finished product.  Assuming that an annual interest of 6% is used to account for the time value of money: (a)  Find the equivalent uniform annual cost associated with this equipment when 10,000 units of finished product are produced each year.  (b)  Now suppose that each unit of finished product generates $300 in revenue.  How many units need to be produced each year in order to break even on this equipment?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section10.A: Mutually Exclusive Investments Having Unequal Lives
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The equipment needed to manufacture a product costs $1,000,000 to purchase.  This equipment has a life of 5 years and a salvage value of $100,000.  Fixed costs for this equipment are $50,000 per year while variable costs are $200 per unit of finished product.  Assuming that an annual interest of 6% is used to account for the time value of money:

(a)  Find the equivalent uniform annual cost associated with this equipment when 10,000 units of finished product are produced each year. 

(b)  Now suppose that each unit of finished product generates $300 in revenue.  How many units need to be produced each year in order to break even on this equipment? 

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