Consider the following investment project with a useful life of 8 years. The mar

Question

Consider the following investment project with a useful life of 8 years. The marketing department estimates that 10,000 units of the proposed product can be sold per year.

Initial Investment: $250,000

Salvage Value: $25,000

Revenues per unit $12

Expenses per unit $6

a. Verify that the project is economically attractive (before-tax) at a 12% MARR with a useful life of 8 years. Answer: PW = $58,153.50, so yes, economically attractive since PW>0.

b. Determine whether this decision is more sensitive to a change in the estimated number of units sold per year or to a change in the initial investment. Answer: More sensitive to a change in the # of units. Can only take a 19.5% decrease in the # of units before decision changes; can take a 23.3% increase in the initial investment before the decision changes.

How do I get these answers?

Explanation / Answer

a) revenue per year = 12*10000 = 120000

Expenses per year = 6*10000 = 60000

So net revenue per year NR = 120000-60000 = 60000

Present worth (PW) = PW of total net revenue + PW of salvage - Initial investment

PW of net revenue = NR/(1+MARR)^1 + NR/(1+MARR)^2 + NR/(1+MARR)^3 + NR/(1+MARR)^4 + NR/(1+MARR)^5 + NR/(1+MARR)^6 + NR/(1+MARR)^7 + NR/(1+MARR)^8

PW of salvage value = 25000/(1+0.12)^8 = 10097.08

So PW = 298058.37+10097.08-250000 = 58155.45 (the small difference may be due to rounding off)

b) The decision change is not mention in answer. So which decision change is answer talking about is not clear.

Year NR MARR PW of NR per year 1 60000 0.12 53571.43 2 60000 0.12 47831.63 3 60000 0.12 42706.81 4 60000 0.12 38131.08 5 60000 0.12 34045.61 6 60000 0.12 30397.87 7 60000 0.12 27140.95 8 60000 0.12 24232.99 Total PW of NR 298058.37

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