Question

Q1. [40 marks] Answer the following multiple-choice questions (Please note that to score full marks in a question, you have to select the correct option and provide a complete correct solution. If you select the correct option while providing an incomplete solution, you will be awarded 50% of the mark. If you select the correct option without providing a solution or if you select an incorrect option, you will get a zero.): a. [10 marks] A supermarket chain buys loaves of bread from its supplier at $0.5 per loaf and sells them at $0.75 per loaf. The chain is considering two options to bake its own bread. Machine A $8,000 Machine B $12,000 Capital investment Useful life (Years) Annual fixed costs $2,000 $3,500 Neither machine has a market value at the end of seven years, and MARR is 10% per year. If the demand for bread at this supermarket is 20,000 loaves per year, what strategy should be adopted for acquiring bread? i. Continue buying from the supplier iii. Install Machine B ii. Install Machine A iv. Install both Machine A and Machine B
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Answer 1

We have the following information

Demand for bread = 20,000 loaves per year

Per loaf cost = $0.50

Annual cost of purchasing the loaf = 20,000 × 0.50 = $10,000

	Machine A	Machine B
Capital investment ($)	8,000	12,000
Useful life (n) in years	7	7
Annual fixed cost ($)	2,000	3,500
MARR (i)	10% or 0.1	10% or 0.1

Machine A

Equivalent uniform annual cost (EUAC) = First Cost(A/P, i, n) + Annual Fixed Cost

EUAC = 8000(A/P, 10%, 7) + 2000

EUAC = 8000[0.1(1 + 0.1)⁷/((1 + 0.1)⁷ – 1)] + 2000

EUAC = 1643.24 + 2000

EUAC of Machine A = $3,643.24

Machine B

EUAC = First Cost(A/P, i, n) + Annual Fixed Cost

EUAC = 12000(A/P, 10%, 7) + 3500

EUAC = 12000[0.1(1 + 0.1)⁷/((1 + 0.1)⁷ – 1)] + 3500

EUAC = 2464.84 + 3500

EUAC of Machine B = $5,964.84

The EUAC of both Machine A and Machine B is less than the annual cost of buying bread. In fact, the annual cost of buying bread is higher than the combined EUAC of both Machine A and Machine B. So, the supermarket chain can buy both the machines.