Question

Fast PC, Inc., is considering a new automated assembly line to automate assembly of tablets. The new line can be installed for $12,450,000 today and will have a life of 7 years until technological obsolescence. At the end of its 7 year life, its components will have a salvage value of $1,200,000, and it will cost $356,250 to have the line removed. The line will produce $5,275,000 additional sales capacity per year due to productivity gains. Additional technical labor cost will be $1,305,000 per year and operating and maintenance costs will be $442,500 per year. The company’s MARR for this project is 18.0%. Based on net present value estimate, do you recommend installing the automated assembly line? What is the equivalent uniform annual worth and IRR of the project? Work in excel and show your formulas you used for each calculation.

Answer 1

Answer:-

Year	Cash flow	Table value @18%	P.V
0	(12,450,000.00)	1.000	(12,450,000.00)
1	3,527,500.00	0.847	2,987,792.50
2	3,527,500.00	0.718	2,532,745.00
3	3,527,500.00	0.608	2,144,720.00
4	3,527,500.00	0.515	1,816,662.50
5	3,527,500.00	0.437	1,541,517.50
6	3,527,500.00	0.370	1,305,175.00
7	3,527,500.00	0.313	1,104,107.50
Salvage	1,200,000.00	0.313	375,600.00
Line removed cost	(356,250.00)	0.313	(111,506.25)
NPV			1,246,813.75

1. Based on net present value estimate, I recommend installing the automated assembly line because NPV is positive amount.

2. What is the equivalent uniform annual worth.

Formula = A = P( A/P,i,n)

We have NPW = 1,246,813.75

Table Value = 0 .2624 ( from compound interest factore table )

EUAW = 1,246,813.75 ( A/P, 7, 18% )

= 1,246,813.75 x ( .2624) = $327,163.92

3.

Year	Cash flow	Table value @18%	P.V
0	(12,450,000.00)	1.000	(12,450,000.00)
1	3,527,500.00	0.847	2,987,792.50
2	3,527,500.00	0.718	2,532,745.00
3	3,527,500.00	0.608	2,144,720.00
4	3,527,500.00	0.515	1,816,662.50
5	3,527,500.00	0.437	1,541,517.50
6	3,527,500.00	0.370	1,305,175.00
7	3,527,500.00	0.313	1,104,107.50
Salvage	1,200,000.00	0.313	375,600.00
Line removed cost	(356,250.00)	0.313	(111,506.25)
NPV			1,246,813.75
IRR			2.87%

IRR is calculate by spread sheet.