Question

Question 4. ( 5 Marks) A medical factory is planning to produce masks. The initial expected cost of expenditure of the factory is $650,000. Assume that the medical factory lifetime is 5 -years and maintenance and operating costs are $25,000 for the first year, increasing by $1000 per year thereafter. The expected demand is assumed to be constant at 1,000,000 masks per year. The annual interest rate is 10%.

a) For how much the factory can sell each mask in order to economically justify the project.
b) If the average price of a mask in the country is $0.3, do you recommend operating the factory? Why?

Answer 1

a) To economically justify the project, the factory needs to determine the selling price per mask that covers the total costs and provides a return on investment. Let's calculate the total costs for each year and the selling price required:

Year 1:

Operating and maintenance cost = $25,000

Total cost = Initial expenditure + Operating and maintenance cost = $650,000 + $25,000 = $675,000

Years 2-5:

Operating and maintenance cost = $25,000 + ($1000 * (year number - 1))

Total cost = Initial expenditure + Operating and maintenance cost = $650,000 + (Operating and maintenance cost for each year)

To calculate the selling price per mask, we divide the total cost by the expected demand:

Selling price per mask = Total cost / Expected demand

Let's calculate the selling price for each year:

Year 1:

Selling price per mask = $675,000 / 1,000,000 = $0.675

Years 2-5:

Selling price per mask = (Initial expenditure + Operating and maintenance cost) / 1,000,000

b) If the average price of a mask in the country is $0.3, we compare it with the selling price per mask calculated in part a. If the calculated selling price per mask is higher than the average price in the country, it may be feasible to operate the factory. However, if the calculated selling price per mask is lower than the average price in the country, it may not be recommended to operate the factory.

Please note that the calculations provided are based on the given information, and other factors such as market competition and demand should also be considered in making a final recommendation.