A Distribution Center Wants to Evaluate an Alternative Product Tracking

question 9

Essay

A distribution center wants to evaluate an alternative product tracking system. The system has an initial cost of $500,000 and a salvage value of $80,000 at the end of its useful life of 7 years. The operating cost is estimated to be $550 per metric ton of product moved per day. The center can handle between 30 and 50 tons per day. Analyze the sensitivity of the PW to changes in a 10- metric- ton increment of product moved. Use an interest rate of 3% per year and 200 days of work per year.

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Definitions:

Payback Period

The time it takes for an investment to generate an amount of income or cash equivalent to the cost of the investment, used as a measure of the investment's risk and profitability.

Discount Rate

The interest rate used to discount future cash flows to their present value, often used in investment appraisal and capital budgeting.

Net Present Value

A financial metric that calculates the difference between the present value of cash inflows and the present value of cash outflows over a period.

Investment

The allocation of resources, such as time, money, or effort, in the expectation of future returns, typically involving some degree of risk.