You must show your work on all problems. You may type your answer right into this document. Total points for project: 45 points. Projects must be submitted as a Microsoft Word document and uploaded to the Dropbox for Unit 4. All Projects are due by Tuesday at 11:59 PM ET of the assigned Unit. NOTE: Project problems should not be posted to the Discussion threads. Questions on the project problems should be addressed to the instructor by sending an email or by attending office hours.
You will be able to come back to the Dropbox and view your graded work or in the Gradebook after your instructor evaluates it.
Project
Get started on the assignment by watching the Should I Buy New Equipment Now? video on the link below then answer the following questions. The engraving department uses an aging rotary engraver to engrave plaques and trophies. The machine has been reliable, but requires regular maintenance and periodic replacement of parts.
Charlie has just found out that this engraver will no longer be supported by the manufacturer. This means that service and parts will be hard to get in the future and if it breaks it could take up to three weeks to get a new machine up and running. They keep this machine running almost 8 hours a day, every day. Each day that the engraver is down will cost around $975 in lost income. If Charlie has to buy a new engraver, it would cost around $25,000. Charlie can get a one-year loan at 12% to buy a new engraver, but he worries that this is a lot of money to spend, especially since the old engraver is still working fine.
He has to make a decision. Should he purchase a new engraver now or wait until the old engraver breaks before ordering a new engraver? What you know: New engraver cost: $25,000 One-year loan cost: 12% interest Revenue per day from engraving: $975 Profit margin on engraving: 25% Potential days lost, if engraver breaks: 18 What you are looking for:
- Cost of new engraver in total if the full value is financed by a 12% loan (not including tax)
- Total amount of revenue that could be lost if the engraver breaks
- Amount of net profit that could be lost if the engraver breaks
- How long it will take to pay for the engraver if the entire net profit is allocated toward paying for it?
- Any other considerations that Charlie should factor into his buying decision
Solution Plan
- The local bank will loan Charlie $25,000 for 1 year at an interest rate of 12% with only one payment due at the end of the year. If Charlie borrows the full $25,000 for the new engraver, what will the total cost of the loan be? $25,000 x 12% = $3,000 $25,000 + $3,000 = $28,000
- Calculate the total amount of revenue (gross profit) that will be lost if the engraver breaks. $975. 00 x 18 = $17,550
- If the engraving business makes $975 per day in revenue and generates a net profit of 25%, how much profit is generated per day? $975 x 25% = $243. 75
- What is the total net profit lost if the engraver is out of commission for the full 18 days? $243. 75 x 18 = $4387. 50
- If the engraver is kept busy 269 full days per year, how much revenue (gross profit) will be generated? $975 x 269 = $262,275
- If the engraver is kept busy 269 full days per year, how much net profit will be generated? $262,275 x 25% = $65568. 75
- Given a 25% profit margin and $975 per day in revenue, how many days would it take for the new engraver to earn back the total cost of purchase, if the entire net profit were allocated to pay for the unit? Round your answer to the next full day. $28,000 / $243. 75 = 115 days
- What other factors should Charlie consider in order to make a good business decision? How long will business be delayed for installation of the new engraver?
- Should Charlie buy the new engraver? Why? Yes because if the new engraver breaks down then it will take a very long time to make up the profits lost.
