Question: A domestic producer of baby carriages, Pramble, buys the wheels from a company in the north of England. Currently the wheels cost $4 each, but for a number of reasons the price will double. In order to produce the wheels themselves, Pramble would have to add to existing facilities at a cost of $800,000. It estimates that its unit cost of production would be $3.50. At the current time, the company sells 10,000 carriages annually. (Assume that there are four wheels per carriage.)
a. At the current sales rate, how long would it take to pay back the investment required for the expansion?
b. If sales are expected to increase at a rate of 15 percent per year, how long will it take to pay back the expansion?