A manufacturing firm is seeking a loan of $ 200,000 to finance production of a n

Question

A manufacturing firm is seeking a loan of $ 200,000 to finance production of a newly patented production line. Owing to good reception of the product at its introductory showing, a bank had agreed to loan the firm an amount equal to 90% of the present worth of firm orders received for delivery during the next 5 years. The orders received are 25,000 for the 1st year, 20,000 for the 2nd year, 15,000 for the 3rd year, 10,000 for the 4th year, and 5,000 for the 5th year. If the product will sell for $4 each, will the present worth of the orders received justify the loan required? The interest rate is 12% compounded annually.

Explanation / Answer

net present worth for 1st year sale 25,000*4= $100,000 = 100,000/(1.12) = $ 89285.714 net present worth for 2nd year sale 20,000*4= $80,000 = 80,000/(1.12)^2 = $ 63775.51 net present worth for 3st year sale 15,000*4= $60,000 = 60,000/(1.12)^3 = $ 42706.81 net present worth for 4th year sale 10,000*4= $ 40,000 = 40,000/(1.12)^4 = $ 25420.72 net present worth for 5th year sale 5,000*4= $10,000 = 10,000/(1.12)^5 = $ 5674.26 Net present worth =89285.714 +63775.51+42706.81+25420.72+ 5674.26 - 200,000 =29863.02256 Present worth = $ 229864.02256

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