You own a factory in Miami. The monthly production of the factory is $100,000 ex

Question

You own a factory in Miami. The monthly production of the factory is $100,000 except during June-September, when it falls to $80,000 due to the heat in the factory. In January 2016 you get an offer to install an air-conditioning system in your factory. The cost of the system is $150,000 and its expected life is 10 years. If the system is installed, you can expect the production in the summer months to equal those of other months of the year. However, the operating cost in the summer months is $9,000 per month (only in the 4 months when you operate the system). You also need to pay a maintenance fee of $5,000 annually in October. What is the NPV of the air-conditioning system if the discount rate is 12% and the corporate tax rate is 35%? Should you invest in the project? Please note that you will use straight line depreciation with 0 salvage value. The annual depreciation cost is realized at the end of December each year

Explanation / Answer

The present value is  20443.59 therefore you should invest in project

Cost of AC 150000 Depreciation 15000 No of Months it will operate 4 Monthly cost 9000 Annual operatiing cost 36000 Maintainance fee 5000 Total annual fees 41000 Monthly Savings / revenue 20000 Annual Savings/revnue 80000

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