For your new product, suppose that Marketing predicts that sales are expected to be 100,000 units in year 1, increasing by 20,000 each subsequent year to 160,000 in year 5. You have two different manufacturing equipment options available:
A manufacturing machine with up-front equipment purchase cost of $120,000, with manufacturing cost per unit of $0.80, and equipment salvage recovery (at end of 5 years) of $20,000.
A machine with up-front equipment purchase cost of $225,000, with manufacturing cost per unit of $0.25, and equipment salvage recovery (at end of 5 years) of $50,000.
Assuming an interest rate of 7% over the 5 year production period, perform an economic analysis and select the best option?