Question
In: Finance
The Ashton Group is developing a new product line. Initial costs for the line are $83191....
The Ashton Group is developing a new product line. Initial costs for the line are $83191. Annual utilities will be $29917. The company plans to concentrate on marketing for the first 3 years at a cost of $11746 per year.
Profits are anticipated to be zero for the first few years. It is estimated the product line will finally have a profit of $453436 at the end of year 6 and profits will continue to increase by 18% each subsequent year.
The new product line will require 7 employees for the first 8 years. The company will then hire 3 additional employees for the remainder of the product line lifespan. Employees are paid an average of $52594 per year. Using a lifespan of 18 years and a nominal annual interest rate of 6% compounded annually, what is the equivalent uniform annual worth of the new product line?
Notes: Count the years carefully when calculating employee expense after the additional employees are hired. Count the years carefully when calculating the number of years of profit.
Solutions
Expert Solution
EUAC=NPV*A/P,6%,18 =
|
WORKINGS
| Year | Cash flow | Utilities | Marketing | Profits | Employee cost | Total Cash flows |
| 0 | -83191 | -83191 | ||||
| 1 | -29917 | -11746 | -368158 | -409821 | ||
| 2 | -29917 | -11746 | -368158 | -409821 | ||
| 3 | -29917 | -11746 | -368158 | -409821 | ||
| 4 | -29917 | -368158 | -398075 | |||
| 5 | -29917 | -368158 | -398075 | |||
| 6 | -29917 | 453436 | -368158 | 55361 | ||
| 7 | -29917 | 535054.5 | -368158 | 136979.48 | ||
| 8 | -29917 | 631364.3 | -368158 | 233289.2864 | ||
| 9 | -29917 | 745009.9 | -525940 | 189152.858 | ||
| 10 | -29917 | 879111.6 | -525940 | 323254.6324 | ||
| 11 | -29917 | 1037352 | -525940 | 481494.7262 | ||
| 12 | -29917 | 1224075 | -525940 | 668218.0369 | ||
| 13 | -29917 | 1444409 | -525940 | 888551.5436 | ||
| 14 | -29917 | 1704402 | -525940 | 1148545.081 | ||
| 15 | -29917 | 2011194 | -525940 | 1455337.456 | ||
| 16 | -29917 | 2373209 | -525940 | 1817352.458 | ||
| 17 | -29917 | 2800387 | -525940 | 2244530.161 | ||
| 18 | -29917 | 3304457 | -525940 | 2748599.85 | ||
| NPV | $3,214,152.58 | |||||
| EUAC | $296,987.70 |
FORMULAE USED
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