Suppose that a manufacturer is going to produce a part which is a component of a number of his assembled products. The demand for the part is expected to last 9 years. The firm's operations planners have developed 2 alternative production sked will affect the equipment requirements and manufacturing costs specifically, these things will be affected as follows:
Sked K Sked L
Required investment P150,000 P100,000
Life 9 years 7 years
Salvage Value P5,000 P3,000
Annual Mfg. Costs P10,000 P12,000
The planners estimate that if Sked L is adopted, the equipment involved will not be replaced at the end of its life. Rather, the production of the part will be subcontracted for 2 years at annual cost of P15,000.
The schedule selected will also have an effect on the size of the average inventory of the part. With Sked K, this average will be about 1,00o units. With SkedL and the subcontracting that follows, it will be about 3,000 units. Annual Inventory carrying cost will be approximately by P10 per unit.
Which sked will the company adopt if the cost of money is 20% per year?
Show your answer using :
1.Present Worth Method
2.Annual Worth Method