The new device must be obtained through a licensing

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Reference no: EM13593159

A newly developed device is being considered by Fairway Foods for use in processing and canning peaches. The device, which is available only on a royalty basis, is reported to be a great labor saver. Fairway's production manager has gathered the following data:

Present labor
method Proposed royalty method
Per year:
Labor cost $ 40,000 $ 5,000
Royalty cost - $ 20,000
Initial startup costs associated with the new device - $ 100,000

The new device must be obtained through a licensing arrangement with the developer. The license period lasts for only 8 years. Fairway Foods' required rate of return is 10%.

Required:

a.By use of the incremental cost approach, compute the net present value of the proposed licensing of the new device.

Net present value $

b. Should the company enter into a licensing arrangement to use the new device?

Reference no: EM13593159

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