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A company has developed a new product
A company has developed a new product. If the MARR is 5%, what is the future worth of producing the new product (at the end of the useful life)? Should the company go forward with the production of the new product? Initial Cost Annual Operating and Maintenance Costs Revenues $5,000,000 $55,000 $750,000 for the first year, decreasing by $35,000 per year for the next 14 years 15 years Useful Life
Expert Solution
| Year |
Calculation (a) ( Yearly receipt - maintenance cost) |
Cash flow (b) | Discount factor @ 5% (c) | Discounted Cash Flow (d= b×c) |
| 1 | 750000-55000 | 695000 | 0.9523 | 661848.5 |
| 2 | 750000-(35000×1)-55000 | 660000 | 0.9070 | 598620 |
| 3 | 750000-(35000×2)-55000 | 625000 | 0.8638 | 539875 |
| 4 | 750000-(35000×3)-55000 | 590000 | 0.8227 | 485393 |
| 5 | 750000-(35000×4)-55000 | 555000 | 0.7835 | 434842.5 |
| 6 | 750000-(35000×5)-55000 | 520000 | 0.7462 | 388024 |
| 7 | 750000-(35000×6)-55000 | 485000 | 0.7106 | 344641 |
| 8 | 750000-(35000×7)-55000 | 450000 | 0.6768 | 304560 |
| 9 | 750000-(35000×8)-55000 | 415000 | 0.6446 | 267509 |
| 10 | 750000-(35000×9)-55000 | 380000 | 0.6139 | 233282 |
| 11 | 750000-(35000×10)-55000 | 345000 | 0.5846 | 201687 |
| 12 | 750000-(35000×11)-55000 | 310000 | 0.5568 | 172608 |
| 13 | 750000-(35000×12)-55000 | 275000 | 0.5303 | 146832.5 |
| 14 | 750000-(35000×13)-55000 | 240000 | 0.5050 | 121200 |
| 15 | 750000-(35000×14)-55000 | 205000 | 0.4810 | 98605 |
Sum of discounted cash inflow (present value of cash inflow) is $ 4,998,527.5
Present value of cash outflow is (given) $5,000,000
Net present value = Present value of cash inflow - Present value of cash outflow
= $4,998,527.5 - $5000,000
= negative $1,472.5
Since the net present value is negative, the company should not go forward with the production of new product.
Company should accept a project only when the net present value is positive.
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