Patrick Corporation inadvertently produced 10,000 defective personal radios. The radios cost $8 each to produce. A salvage compa
ny will purchase the defective units as they are for $3 each. Patrick's production manager reports that the defects can be corrected for $5 per unit, enabling them to be sold at their regular market price of $12.50. Patrick should:a) Sell the radios for $3 per unit.
b) Correct the defects and sell the radios at the regular price.
c) Sell the radios as they are because repairing them will cause their total cost to exceed their selling price.
d) Sell 5,000 radios to the salvage company and repair the remainder.
e) Throw the radios away.
b) Correct the defects and sell the radios at the regular price.
c) Sell the radios as they are because repairing them will cause their total cost to exceed their selling price.
d) Sell 5,000 radios to the salvage company and repair the remainder.
e) Throw the radios away.
1 answer:
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Answer:
Hence, the the maximum amount the company could invest in the project is $1081432.86 and yes, the project should be accepted as the value is greater than initial investment.
Therefore, the correct option is b. $1,081,434
Explanation:
Here, maximum amount means the sum of present value of all cash inflows
So,
Present value = all Year cash inflows × Discounted factor of each year
where,
Year 1, year 2, year 3, year 4, and year 5 have same cash flows i.e. $300,000
But the discounted factor is different in each year
The calculation of discounted factor = 1 ÷ (1+0.12) ^ 1
where,
0.12 = rate
^1 = for year 1, ^2 = for year 2 and so on.
The discounted rate for year 1, , year 2, year 3, year 4, and year 5 is 0.8929
, 0.7972
, 0.7118
, 0.6355
, 0.5674 respectively.
Now, multiply the cash flow amount with discounted rate for each year to get presented value of all years.
Year 1 = $300,000 × 0.8929 = $267,857.14
Year 2 = $300,000 × 0.7972 = $239,158.16
Year 3 = $300,000 × 0.7118 = $213,534.07
Year 4 = $300,000 × 0.6355 = $190,655.42
Year 5 = $300,000 × 0.5674 = $170,228.06
Then, sum all the presented values of all year to get maximum amount
= $267,857.14 + $239,158.16 + $213,534.07 + $190,655.42 + $170,228.06
= $1,081,432.86
So, we attached the sheet for better understanding.
Hence, the the maximum amount the company could invest in the project is $1081432.86 and yes, the project should be accepted as the value is greater than initial investment.
Therefore, the correct option is b. $1,081,434
