A company is considering constructing a plant to manufacture a proposed new product

We get the follwoing data from the above given question :-

Land costs = $300,000

Building costs = $600,000

Equipment costs = $250,000

Additional working capital required = $100,000

Expected Sales per year for 10 years = $750,000

Salvage Value of the following items after 10 years :-

Land cost = $400,000

Building cost = $350,000

Equipment cost = $50,000

All of the working capital would be recovered at the EOY 10 i.e. amount of working capital will be = $100,000

Annual expenses = $475,000

MARR = 15% per annum or, 0.15 per annum

Therefore, the total amount of investment in the project = ($300,000 + $600,000 + $250,000 + $100,000)

= $1,250,000

Expected sales per annum = Annual revenue = $750,000

Annual Expenditure = $475,000

As we know, Net Income = Revenue - Expenses

Thus, Net Income of the project per year = ($750,000 -  $475,000) = $275,000

Worth or valuation of the invetment in the project after 10 years = Total salvage value + Recovered Additional WC

= ($400,000 + $350,000 + $50,000 + $100,000)

= $900,000

Capital Recovery Factor where the MARR is given @ 15% per annum for 10 years is given by :-

(A/P, i% ,n) = {i * (1+i)ⁿ} / {(1+i)ⁿ - 1}

Or, (A/P, 15%, 10) = {0.15 * (1+0.15)¹⁰} / {(1+0.15)¹⁰ - 1}

= (0.15 * 4.045558) / (4.045558 - 1)

= 0.199

Sinking Fund Factor where the MARR is given @ 15% per annum for 10 years is given by :-

(A/F, i%, n) = i / {(1+i)ⁿ - 1}

Or, (A/F, 15%, 10) = 0.15 / (1+0.15)¹⁰ - 1

= 0.049

Therefore, the Net Annual Worth of the project :-

- 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)

= -$248,750 + $275,000 + $44,100

= $70,350

Since the net annual worth yields a positive value, investment is the new product line would be worth taking.