Question

A company decided to develop low-cost photo-voltaic solar-energy cells. It decided on two development choices: a fully automatic line for $800,000 capable of producing 200,000 cells/year for a profit of $1/cell, or a semi-automatic line for $500,000 capable of producing 120,000 cells/year for a profit $1/cell. It is estimated that both lines will last for five years and will have a book value at the end of the five years of 10 percent. Assume both lines will be working to 100 percent capacity. You are the PM for development. Please make all calculations with or without taxes. Assuming an interest rate of 5% and life of n = 5 years with no tax consequences or book value remaining, show sensitivity analysis for PV for semi-automatic machine @ 120,000 cells sold/year @ $1 profit per cell machine, assuming ± 20% variations in the profit per cell and useful life. Plot the PV results versus the profit and useful life ± 20% variations.

Answer 1

Variations in life of the asset will be - 5 years, +20% will be 6 years, -20% will be 4 years

Variations in profit per cell - $1, +20% will be $1.2, -20% will be 0.8

The solution is:

Life of the asset	Profit @-20%	Profit @$1 per cell	Profit @+20%
4 Years	381,546.37	466,649.18	551,752.00
5 Years	454,806.07	558,713.51	662,620.95
6 years	524,577.21	646,393.82	768,210.43

Workings:

Number of units- sold	120,000
Original Useful life	5				Present value
Present Value	Profit @$1 per cell (a)	Profit @+20% (b)	Profit @-20% ©	PVF	PVF *a	PVF *b	PVF *c
Year 1	120,000	144,000	96,000	0.952381	114,285.71	137,142.86	91,428.57
Year 2	120,000	144,000	96,000	0.907029	108,843.54	130,612.24	87,074.83
Year 3	120,000	144,000	96,000	0.863838	103,660.51	124,392.61	82,928.41
Year 4	120,000	144,000	96,000	0.822702	98,724.30	118,469.16	78,979.44
Year 5	120,000	144,000	96,000	0.783526	94,023.14	112,827.77	75,218.51
Year 6	120,000	144,000	96,000	0.746215	89,545.85	107,455.02	71,636.68
Residual value - Year 5	50,000	50,000	50,000	0.783526	39,176.31	39,176.31	39,176.31
Residual value - Year 6	50,000	50,000	50,000	0.746215	37,310.77	37,310.77	37,310.77
Residual value - Year 4	50,000	50,000	50,000	0.822702	41,135.12	41,135.12	41,135.12
Life - 5 years - Add PVF from Year 1 thru year 5 and residual value at Year 5					558,713.51	662,620.95	454,806.07
Life - 6 years - Add PVF from Year 1 thru year 6 and residual value at Year 6					646,393.82	768,210.43	524,577.21
Life - 4 years - Add PVF from Year 1 thru year 4 and residual value at Year 4					466,649.18	551,752.00	381,546.37

Graph: