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Homework answers / question archive / A company is considering constructing a plant to manufacture a proposed new product
A company is considering constructing a plant to manufacture a proposed new product. The land costs $300,000, the building costs $600,000, the equipment costs $250,000, and $100,000 additional working capital is required. It is expected that the product will result in sales of $750,000 per year for 10 years, at which time the land can be sold for $400,000, the building for $350,000, and the equipment for $50,000. All of the working capital would be recovered at the EOY 10. The annual expenses for labor, materials, and all other items are estimated to total $475,000. If the company requires a MARR of 15% per year on projects of comparable risk, determine if it should invest in the new product line. Use the AW method.
Here land costs = $300,000 , building costs = $600,000 ,equipment costs = $250,000
additional working capital = $100,000 ,Expected sales per year for 10 years = $750,000
Salvage value After (10years): Cost of land = $400,000 ,Building = $350,000 ,Equipment = $50,000
All working capital will be recovered at end of year, Hence, working capital will be $100,000
Annual expenses = $475,000 MARR = 15% per annum
Total amount invested = $(300,000 + 600,000 + 250,000 + 100,000) = $1,250,000
Expected sales per Annum = annual revenue = $750,000
Expenditure per year = $475,000
Net income = Revenue - Expenditure
Net income = $750,000 - $475,000 = $275,000
Worth or valuation of investment after 10 years :
($400,000 + $50,000 + $350,000 + $100,000)= $900,000
Hence, Capital recovery factor : (A/P, 15%, 10) = 0.199
Sinking fund table : (A/F, 15%, 10) =0.049
NET ANNUAL WORTH :-Initial investment(A/P, 15%, 10) + annual net income + salvage value(A/F, 15%,10)
= - 1,250,000(0.199) + 275,000 + 900,000(0.049)
= $70,350
The investment is economically justified as the net annual worth yields a positive value.
