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Question: Salt Lake Systems is a small company started by two recent college graduates to market a small-business inventory management system they developed and patented as a class project. The system requires a special hard disk drive that plugs into a microcomputer. Buy and Modify Alternative: With this alternative, Salt Lake Systems would buy standard hard-disk systems at $2,200 and then modify them at a cost of $900 each. Annual fixed cash outlays for the modification operation would be $50,000. Capital investment requirements will be $30,000 to modify. Build Alternative: Under this alternative, Salt Lake Systems would construct the special hard-disk system from scratch. Component pans can be readily purchased, and the production process is not complex. The variable cost to build each special hard-disk system would be $2,000. Annual fixed cash outlays for the building alternative would be $100,000. Capital investment requirements will be $60,000 to build.
Salt Lake Systems plans to price the systems at $4,995 each because they have a patent and proprietary software. The partners estimate that they can complete 100 units a year, either building or modifying. Potential demand could be for thousands of units a year, but could also be only a fraction of capacity. The partners do not have enough information to estimate probabilities and cannot afford market research. They recognize that technology changes rapidly and, therefore, use a 3-year life for analysis. The cost of capital is 12 percent, and the partners are not subject to income tax. Use net present value break-even analysis to recommend a production method.
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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