20 pts To make an item in house the company must purchase eq

(20 pts.) To make an item in house, the company must purchase equipment that costs $250,000, has a life of 5 years, and an annual cost of $80,000. It will cost $40 per unit per year to manufacture the product. The company is considering the alternative to buy the same product from a vendor at a cost of $100 per unit per year. The company\'s MARR-1090. If the company expects to need 2,000 units per year, which alternative should the company choose, based on a present worth analysis3.S.

Solution

Annual Cost=$80000 per year

Initial Cost=$250000

PW if Machine is purchased then =-250000-80000/1.15-80000/1.15^2-80000/1.15^3-80000/1.15^4-80000/1.15^5=-518,172.4

If product bought from outside

100*2000=200,000 per year

200.000+200,000/1.15+200,000/1.15^2+200,000/1.15^4+200,000/1.15^5=539,127.8

PW of Cost from Machine< PW of purchase from outside

Hence machine should be bought