Sensotech Inc., a maker of microelectromechanical systems, believes it can reduce product recall by 10% if it purchases new software for detecting faulty parts. the cost of the new software is 225000.
1- how much would the company have to save each year for 4 years to recover its investment if it uses a minimum attractive rate of return of 15% per year?
2-What was the cost of recalls per year before the software was purchased if the company did exactlyy recover its investment in 4 years from the 10% reduction?
Help please
sold its prescription drug business to Warner-Chilcott, Ltd. for $3.1 billion. If income from product sales is $2 billion per year and net profit is 20% of sales, what rate of return will the company make over a 10-year planning horizon?
To answer these questions, we need to calculate the annual savings from the reduced recalls and determine the cost of recalls before the software was purchased.
1. Calculate the annual savings:
The company believes it can reduce product recalls by 10% by purchasing the new software. Let's assume the cost of recalls before the software was purchased was X dollars per year.
After purchasing the software, the company would save 10% of X dollars each year, which is 0.10X dollars.
To recover the investment of $225,000 in 4 years, the company would need to save a total of $225,000. Therefore, the annual savings required would be $225,000 divided by 4, which is $56,250.
So, the company would need to save $56,250 per year for 4 years to recover its investment.
2. Determine the cost of recalls per year:
If the company did exactly recover its investment in 4 years from the 10% reduction, it means that the total savings over those 4 years would be equal to $225,000.
Since the annual savings required is $56,250, we can calculate the cost of recalls before the software was purchased:
Cost of recalls per year = Annual savings required + 10% of the cost of recalls per year
$56,250 + 0.10X = X
Simplifying the equation:
0.10X - X = -$56,250
-0.90X = -$56,250
X = -$56,250 / -0.90
X = $62,500
Therefore, the cost of recalls per year before the software was purchased was $62,500.