(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:
| Present Labor | Proposed Royalty | ||||||||
| Method | Method | ||||||||
| Per year | |||||||||
| Labor cost | $ | 55,000 | $ | 7,000 | |||||
| Royalty cost | $ | 24,000 | |||||||
| Initial start up costs associated with the new device | $ | 200,000 | |||||||
| The new device must be ontained through a licensing arrangement with the developer. The license period | |||||||||
| lasts for only 8 years. Fairway Food’s require 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. (negative amount should be indicated by a minus sign. Round “PV factor” to 3 | |||||||||
| decimal places. Round your other intermedate calculations and final answers to the nearest | |||||||||
| whole dollar. ) (use exhibit 11b 2) | |||||||||
| Net present value | $ | ||||||||