(Ignore Income Taxes in This Problem

question 141

Essay

(Ignore income taxes in this problem.) 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: 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:
By use of the incremental cost approach, compute the net present value of the proposed licensing of the new device. Show all computations in good form. Should the company enter into a licensing arrangement to use the new device?

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Definitions:

Internal Control

Systems and procedures designed to ensure the accuracy and reliability of financial reporting, compliance with laws and regulations, and effective and efficient operations.

Voucher Register

A record of vouchers that have been prepared, authorized, and paid; it serves as a chronological record of business transactions.

Petty Cash

A small amount of cash kept on hand in a business for making everyday, minor expenditures.

Cash Reserve

Funds that a company sets aside to meet short-term and emergency funding needs.