Thank you 6. A manufacturing firm is considering the production of a new electro
ID: 2755189 • Letter: T
Question
Thank you 6. A manufacturing firm is considering the production of a new electronic device. This project has an estimated life of 7 years and requires an initial capital outlay of $$.2 million. The salvage value is negligible. The fixed production costs will amount to $1 million per year. However, the demand and the unit variable production costs (assumed constant within the plant's range of operating capacities) for such a new device are uncertain. A market survey and a detailed cost analyses have yielded the following information concerning these parameters (highest probability is most probable): Probability Unit Variable Costs Annual Demand (units) 40,000 50,000 60,000 Probability 0.2 0.5 0.3 0.1 0.2 0.6 0.1 45 The firm's cost of capital is 15% () and the selling price of the new device is $100 per unit. Assume that annual demand and unit variable production costs are independent. Please ignore income taxes. Determine the expected value (EV) for total annual operating costs. [$3,473,500] Determine the most-likely net present value.[$1,040,600] a. b.
Explanation / Answer
Expected variable cost per unit
Unit cost
Probability
Unit cost*Probability
$40
0.1
$4.00
$45
0.2
$9.00
$50
0.6
$30.00
$55
0.1
$5.50
$48.50
Expected total variable cost at different demand levels
Annual demand (units)
Probability
Expected variable cost per unit
Total variable cost
Expected variable cost
40000
0.2
$48.50
$1,940,000.00
$388,000.00
50000
0.5
$48.50
$2,425,000.00
$1,212,500.00
60000
0.3
$48.50
$2,910,000.00
$873,000.00
$2,473,500.00
Expected variable cost = $2,473,500
Fixed costs = $1,000,000 + $2,473,500 = $3,473,5000
Unit cost
Probability
Unit cost*Probability
$40
0.1
$4.00
$45
0.2
$9.00
$50
0.6
$30.00
$55
0.1
$5.50
$48.50
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