n for a new product line was prepared by a task force from Engineering and Sales

Question

n for a new product line was prepared by a task force from Engineering and Sales. 3. A projectio The plan presented to management calls for an initial investment of projected to generate annual revenue which increases at 10% per year, with a first year revenue of $5,000,000. Annual costs which are estimated at $2,500,000 for the first year, are expected to benefit from increased production efficiency and lower raw material costs to the extent of a 5% annual cost reduction. The task force has made a case for a 10 year study $15,000,000 which is eriod, which management has accepted. Calculate the annual rate of return (ROI) for this projection. The company uses an MARR of 15%. Is the project attractive?

Explanation / Answer

Calculation of Annual rate of interest Year Sales Cost Income Present Value Present value of income Increase 10% Reduction 5% ( Sales - Cost ) @ 15% MARR ( 1/1.15) ( Income * PV MARR ) Year - 1 5000000 2500000 2500000 0.8696 2173913.043 Year - 2 5500000 2375000 3125000 0.7561 2362948.96 Year - 3 6050000 2256250 3793750 0.6575 2494452.207 Year - 4 6655000 2143438 4511563 0.5718 2579500.502 Year - 5 7320500 2036266 5284234 0.4972 2627198.395 Year - 6 8052550 1934452 6118098 0.4323 2645022.451 Year - 7 8857805 1837730 7020075 0.3759 2639106.318 Year - 8 9743586 1745843 7997742 0.3269 2614476.131 Year - 9 10717944 1658551 9059393 0.2843 2575244.898 Year - 10 11789738 1575624 10214115 0.2472 2524772.997 Total PV of Income 25236635.9 Total income of PV @ 15% MARR 25236636 Investment at Year - 0 / Intial investment 15000000 Net income 10236636     = ( 25236636 - 15000000 ) 15000000 ROI 68.24 %

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