Question

1. Jones Manufacturing is a newly established company that produces and sells components of electrical fixtures Currently, it has an opportunity to invest $1,000,000 in the equipment needed to produce plastic fixtures for kitchen use. If the company decides to sell kitchen fixtures, it has reason to believe that it can generate the following profit stream during a six-year life cycle for kitchen fixtures. End of Year Profit 1 $ 10,000 2 100,000 3 500,000 4 600,000 5 400,000 6 200,000 At the end of six years, the company can sell the capital used to make kitchen fixtures for $50,000. If the interest rate on money available to Jones is 11% per year, should it invest in kitchen fixtures?

Answer 1

Ans: Yes, it should invest in kitchen fixtures .

Explanation:

PW = - $1,000,000 + $10000( P / F , i , n ) +  $100000( P / F , i , n ) +  $500000( P / F , i , n ) + $600000( P / F , i , n ) + $400000( P / F , i , n ) + $200000( P / F , i , n ) + $50000( P / F , i , n )

= - $1,000,000 + $10000( P / F , 11% , 1 ) +  $100000( P / F , 11% , 2 ) +  $500000( P / F , 11% , 3 ) + $600000( P / F , 11% , 4 ) + $400000( P / F , 11% , 5 ) + $200000( P / F , 11% , 6 ) + $50000( P / F ,11%, 6 )

= - $1,000,000 + $10000( 0.9009 ) +  $100000( 0.8116 ) +  $500000( 0.7312 ) + $600000( 0.6587 ) + $400000( 0.5935 ) + $200000(0.5346 ) + $50000( 0.5346 )

= - $1,000,000 + $9009 + $81160 +  $365600 + $395220+ $237400 + $106920+ $ 26730

= - $1,000,000  + $1,222,039

=$222039

It should invest in kitchen fixtures because there is positive present worth of this investment.