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:
- Present labor
- method Proposed royalty method
- Per year:
- Labor cost $ 40,000 $ 5,000
- Royalty cost - $ 20,000
- Initial startup costs associated with the new device - $ 100,000
The new device must be obtained through a licensing arrangement with the developer. The license period lasts for only 8 years. Fairway Foods' required 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.
Net present value $
b. Should the company enter into a licensing arrangement to use the new device?