Question Description

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the engraving departmentuses an aging rotary engraver to engrave plaques and trophies. the machine hasbeen reliable, but requires regular maintenance and periodic replacement ofparts. charlie has just found out that this engraver will no longer besupported by the manufacturer. this means that service and parts will be hardto get in the future and if it breaks it could take up to three weeks to get anew machine up and running. they keep this machine running almost 8 hours aday, every day. each day that the engraver is down will cost around $975 inlost income.

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if charlie has to buy anew engraver, it would cost around $25,000.

charlie can get aone-year loan at 12% to buy a new engraver, but he worries that this is a lotof money to spend, especially since the old engraver is still working fine. hehas to make a decision.

should he purchase a newengraver now or wait until the old engraver breaks before ordering a newengraver?

whatyou know:

new engraver cost:$25,000

one-year loan cost: 12%interest

revenue per day fromengraving: $975

profit margin onengraving: 25%

potential days lost, ifengraver breaks: 18

whatyou are looking for:

1.         cost of new engraver in total if the full value is financed by a12% loan (not including tax)

2.         total amount of revenue that could be lost if the engraver breaks

3.         amount of net profit that could be lost if the engraver breaks

4.         how long it will take to pay for the engraver if the entire netprofit is allocated toward paying for it?

5.         any other considerations that charlie should factor into hisbuying decision

solutionplan:

1.         the local bank will loan charlie $25,000 for 1 year at an interestrate of 12% with only one payment due at the end of the year. if charlieborrows the full $25,000 for the new engraver, what will the total cost of theloan be?

2.         calculate the total amount of revenue (gross profit) that will belost if the engraver breaks.

3.         if the engraving business makes $975 per day in revenue andgenerates a net profit of 25%, how much profit is generated per day?

4.         what is the total net profit lost if the engraver is out ofcommission for the full 18 days?

5.         if the engraver is kept busy 269 full days per year, how muchrevenue (gross profit) will be generated?

6.         if the engraver is kept busy 269 full days per year, how much netprofit will be generated?

7.         given a 25% profit margin and $975 per day in revenue, how manydays would it take for the new engraver to earn back the total cost of purchase,if the entire net profit were allocated to pay for the unit? round your answerto the next full day.

8.         what other factors should charlie consider in order to make a goodbusiness decision?

9.         should charlie buy the new engraver? why?

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