It is estimated that the annual sales of an energy saving device will be 25,000 the first year and increase by 10,000 per year until 55,000 units are sold during the fourth year. In the fifth year and each year thereafter the sales will decrease by 5000 units per year until reaching 25000 in year ten.
Proposal A is to purchase manufacturing equipment costing $125,000 with an estimated salvage value of $20,000 at the end of 10 years. Proposal B is to purchase equipment costing $285,000 with an estimated salvage value of $50,000 at the end of 10 years. The variable manufacturing cost per unit under proposal A is estimated to be $0.80, but is estimated to be only $0.26 under proposal B. If the interest rate is 9%, which proposal should be accepted for a 10-year production horizon?