(Ignore income taxes in this problem.) A newly developed device is being considered by Fairway Foods for use in processing and canning peaches. The device, which is available only on a royalty basis, is reported to be a great labor saver. Fairway's production manager has gathered the following data:
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Present Labor |
Proposed Royalty |
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Method |
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Method |
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| Per year |
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| Labor cost |
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$ |
55,000 |
$ |
7,000 |
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| Royalty cost |
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$ |
24,000 |
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| Initial start up costs associated with the new device |
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$ |
200,000 |
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The new device must be ontained through a licensing arrangement with the developer. The license period lasts for only 8 years. Fairway Food's require rate of return is 10%.
Required:
a. By use of the incremental cost approach, compute the net present value of the proposed licensing of the new device. (negative amount should be indicated by a minus sign. Round "PV factor" to 3 decimal places. Round your other intermedate calculations and final answers to the nearest whole dollar. )
Net present value