It is evalauted that annual sales of the new product will be 2,000 first year and increase by 1,000 per year until 5,000 are sold during 4th year.
Proposal A is to buy manufacturing equipment costing $12,000 with evaluated salvage value of $2000 at end of 4 years.
Proposal B is to buy manufacturing equipment costing $28,000 with the evaluated salvage value of $5,000 at end of 4 years. Variable manufacturing cost per unit under proposal A is evaluated to be $0.80, but evaluated to be only $0.25 under proposal B.
If interest rate is 9%, which proposal must be accepted for four-year production period?