You are the owner of a factory located in a hot tropical climate. The monthly pr
ID: 2818541 • Letter: Y
Question
You are the owner of a factory located in a hot tropical climate. The monthly production of the factory is $100,000 except during June–September, when it falls to $80,000 because of the heat in the factory. In January 2010 you get an offer to install an air-conditioning system in your factory. The cost of the air-conditioning system is $150,000 and its expected life span is 10 years. If you install the air-conditioning system, the production in the summer months will equal the production in the winter months. However, the cost of operating the system is $9,000 per month (only in the 4 months that you operate the system). You will also need to pay a maintenance fee of $5,000 annually in October. What is the NPV of the air-conditioning system if the interest rate is 12% and the corporate tax rate is 35% (the depreciation costs are recognized in December of each year)?
(Hint: start with figuring out the cash flows in each year. Outline the cash flows in Jan. to Dec. of each year; Bring these cash flows to the end of each year (i.e., December) by compounding any cash flows in a given month for the approximate number of months (for instance, if you have a CF in October, then compound this CF for (2/12) years to bring this CF to end of December.). Once you have CFs in each year, you can start working on the NPV.)(20 points)
Explanation / Answer
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 80000Related Questions
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