A company is considering constructing a plant to manufacture a propsed new produ

Question

A company is considering constructing a plant to manufacture a propsed new product...

A company is considering constructing a plant to manufacture a proposed new product. The land costs $300,000, the building costs $650,000, the equipment costs $250,000, and $100,000 additional working capital is required. It is expected that the product will result in sales of $850,000 per year for 12 years, at which time the land can be sold for $350,000, the building for $350,000, and the equipment for $60,000. All of the working capital would be recovered at the EOY 12. The annual expenses for labor, materials, and all other items are estimated to total $475,000. If the company requires a MARR of 12% per year on projects of comparable risk, determine if it should invest in the new product line. Use the AW method. f ss ote oeie sk. Click the icon to view the interest and annuity table for discrete compounding when the MARRIs 12 per year. The AW is s(Round to the nearest dollar.)

Explanation / Answer

Solution: 200,768

Working:

Capital Investment = ?$300,000 ? $650,000 ? $250,000 ? $100,000 = ?$1,300,000

Revenue = $850,000 per year

Salvage Value = $350,000 + $350,000 + $60,000 + $100,000 = $860,000

Expenses = ?$475,000 per year

AW(12%) = $850,000 ? $475,000 ? $1,300,000(A/P, 12%, 12) + $850,000(A/F, 12%, 12)

= $850,000 ? $475,000 ? ($1,300,000 * 0.1614) + ($860,000 * 0.0414)

= $850,000 ? $475,000 ? ($1,300,000 * 0.1614) + ($860,000 * 0.0414)

= 200,767.80 > 0

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