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
To answer these questions, we need to perform some calculations based on the given information. Let's break it down step by step:
1. Calculating the annual savings needed to recover the investment:
- The cost of the software is $225,000.
- The expected reduction in product recalls is 10%.
- The minimum attractive rate of return is 15%.
To calculate the annual savings, we multiply the investment by the minimum attractive rate of return:
Annual Savings = Investment × Minimum Attractive Rate of Return
Annual Savings = $225,000 × 0.15 = $33,750
Therefore, the company would have to save $33,750 each year for 4 years to recover its investment.
2. Calculating the cost of recalls per year before the software was purchased:
If the company did recover its investment in 4 years from the 10% reduction, it means that the annual savings of $33,750 would equal the cost of recalls per year before the software was purchased.
Annual Cost of Recalls = Annual Savings
Annual Cost of Recalls = $33,750
Therefore, the cost of recalls per year before the software was purchased was $33,750.