U.S. Steel is considering a plant expansion to produce austenitic, precipitation
ID: 1141337 • Letter: U
Question
U.S. Steel is considering a plant expansion to produce austenitic, precipitation hardened, duplex, and martensitic stainless steel round bars that is expected to cost $15 million now and another $10 million 1 year from now. If total operating costs will be $1.3 million per year starting 1 year from now, and the estimated salvage value of the plant is virtually zero, how much must the company make annually in years 1 through 12 to recover its investment plus a return of 22% per year?
The company must make $ ?? million annually in years 1 through 12 to recover its investment plus a return of 22% per year.
Explanation / Answer
Annual revenue = A , i = 22% and n = 12
Equating costs (PV) to PV of revenue :
15 + 10/1.22 + 1.3/1.22 + 1.3/1.222 +..... 1.3/1.2212 = A/1.22 + A/1.222 +..... + A/1.2212
A = $ 6.92 mn
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