4 John an antique furniture refinisher has been so successfu

4. John, an antique furniture refinisher, has been so successful with his small business that he is planning to expand his shop. He is going to start enlarging his shop by purchasing the following equipment Equipment Varnish bath Power scraper Paint booth Original Size 50 gal 3/4 h 3 ft Cost of Original Equipment $3500 $250 $3000 Power-Sizing Exponent 0.8 0.22 0.6 New Equipment Size 75 gal 1.5 hp 1.2 ft3 What would be John\'s net cost to obtain this equipment? Assume that he can sell the old equipment in for 15% of its original cost. Additionally, assume there has been no inflation in equipment prices 5. Reconsider problem 4. Now assume the prices for the equipment that John wants to replace have not been constant. Listed below are the cost index data for each piece of equipment to update the costs to the price that would be paid today. Develop the overall cost for John, again assuming 15% trade-in allowance for old equipment based on original cost Original Equipment Varnish bath Power scraper Paint booth Cost Index When Originally Purchased 154 780 49 Cost Index Today 900 76

Solution

4.

John\'s net cost to obtain the new equipment is :

(Cost of new equipment) - (Amount realised by selling old equipment)

Firstly, calculate the amount realised on selling old equipment.

Cost of old equipment is:

=$(3500+250+3000)

= $ 6750

Given that the old equipment can be sold for 15% of original cost:

= 0.15 * 6750 = $ 1012.50

Component 1 - Varnish bath

Cost of old varnish bath (50 gal) is $3500 so 1 gal of capacity costs 3500 / 50,i.e.,$70.But the power sizing exponent is given as 0.8 so cost of exponent (i.e., 25 gal) is 25* 70* 0.80

i.e $1400

So total cost of new varnish bath is 3500+1400.i.e., $4900

Component 2- Power scrapper

Cost of (3/4 hp) is $250 so 1 hp of capacity costs (250)/(0.75),i.e.,$333.33.But the power sizing exponent is given as 0.22

So cost of exponent required (i.e., 0.75 hp ) is 0.75* 333.33* 0.22

i.e.,$54.99

~$55

Total cost of new power scrapper is $250+$55 i.e.,$305

Component 3 - Paint booth

Cost of Paint booth (3ft) is $3000. So 1 ft costs (3000)/(3),i.e.,$1000.But the power sizing exponent is given as 0.6

Here the paint booth should be reduced from 3ft to 1.2 ft i.e., by 1.8 ft

Cost of exponent to reduce length by 1.8 ft is 1.8 * 1000 * 0.6

i.e., $1080

Total cost of new paint booth is $1080+$3000 = $4080

Total cost of new equipment = Cost of all new components

= 4900+305+4080

= $9285

Net cost to acquire new equipment = $9285 - $1012.50

= $ 8272.50

5.

Since the cost index has increased so the prices of both the exponential and original component would increase.But the cost realised on old equipment would remain the same i.e.,$1012.50

Total Cost of new varnish bath = $4900 *(171 / 154)

= $5440.90

Total cost of new Power scrapper = 305*(900 / 780)

= $351.92

Total cost of new Paint booth = 4080 * (76 / 49)

= 6328.16

Net cost to obtain the equipment acc to new equipment is : (5440.90 +351.92 + 6328.16) - (1012.50)

= $11,108.48