In: Economics
Here,
Soda can produced per hour = 500
Number of working hours a day = 8
Number of working days in a year = 200
So soda can produced per year = 200*8*500 = 800000
Price of Can of Soda= $0.89
Yearly Revenue = 0.89*800000 = $712000
Maintainance cost in year 1 and 2 = $125,000
Maintainance cost increases by $50000 every year after that
Fixed Cost = $100,000
Salvage Value after 5 years = $55,000
Salvage Value after 10 years = $20,000
So Cash Flow if machine operated for 5 years,
28-07-2021 | 28-07-2022 | 28-07-2023 | 28-07-2024 | 28-07-2025 | |
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
Revenue | 712000 | 712000 | 712000 | 712000 | 712000 |
Operating Cost | 125000 | 125000 | 175000 | 225000 | 275000 |
Fixed Cost | 100000 | 100000 | 100000 | 100000 | 100000 |
Salvage Value | 55000 | ||||
Cash Flow | 487000 | 487000 | 437000 | 387000 | 392000 |
Net Present Value for 5 years,
= 487000/ (1+.1) + 487000/((1+.1)^(2))+ 437000/((1+.1)^(3))+ 387000/((1+.1)^(4))+ 392000/((1+.1)^(5))
NPV = $1681258.5
So Cash Flow if machine operated for 10 years,
28-07-2021 | 28-07-2022 | 28-07-2023 | 28-07-2024 | 28-07-2025 | 28-07-2026 | 28-07-2027 | 28-07-2028 | 28-07-2029 | 28-07-2030 | |
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Year 9 | Year 10 | |
Revenue | 712000 | 712000 | 712000 | 712000 | 712000 | 712000 | 712000 | 712000 | 712000 | 712000 |
Operating Cost | 125000 | 125000 | 175000 | 225000 | 275000 | 325000 | 375000 | 425000 | 475000 | 525000 |
Fixed Cost | 100000 | 100000 | 100000 | 100000 | 100000 | 100000 | 100000 | 100000 | 100000 | 100000 |
Salvage Value | 20000 | |||||||||
Cash Flow | 487000 | 487000 | 437000 | 387000 | 337000 | 287000 | 237000 | 187000 | 137000 | 107000 |
Net Present Value for 10 years,
= 487000/ (1+.1) + 487000/((1+.1)^(2))+ 437000/((1+.1)^(3))+ 387000/((1+.1)^(4))+ 337000/((1+.1)^(5))+ 287000/((1+.1)^(6))+ 237000/((1+.1)^(7))+ 187000/((1+.1)^(8))+ 137000/((1+.1)^(9))+ 107000/((1+.1)^(10))
NPV = $2117321.75
Since Net present value for working for 10 years is higher, hence he should retire after 10 years