Question

In: Economics

The Ashton Group is developing a new product line. Initial costs for the line are $87985....

The Ashton Group is developing a new product line. Initial costs for the line are $87985. Annual utilities will be $34193. The company plans to concentrate on marketing for the first 4 years at a cost of $13812 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 $466925 at the end of year 5 and profits will continue to increase by 19% each subsequent year.

The new product line will require 8 employees for the first 9 years. The company will then hire 3 additional employees for the remainder of the product line lifespan.

Employees are paid an average of $57263 per year. Using a lifespan of 21 years and a nominal annual interest rate of 2% 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.

Enter your answer as 12345

Round your answer. Do not use a dollar sign ("$"), any commas (","), or a decimal point (".").

Solutions

Expert Solution

Initial investment = 87985

MARR= 2%

time = 21 yrs

Per employee payment= 57263

profit starting from 5th yr and increasing at 19% each yr

Marketing cost of 13812 for 4 yrs

annual utilites = 34193

Finding net cash flow and present value using excel we get

Year Invesetment Employee payment Utilities Profit Marketing costs Net Cash Flow Discount Factor Present value
0 -87,985.00 -87,985.00 1.000000 -87,985.00
1 -4,58,104.00 -34,193.00 -13,812.00 -5,06,109.00 0.980392 -4,96,185.29
2 -4,58,104.00 -34,193.00 -13,812.00 -5,06,109.00 0.961169 -4,86,456.17
3 -4,58,104.00 -34,193.00 -13,812.00 -5,06,109.00 0.942322 -4,76,917.81
4 -4,58,104.00 -34,193.00 -13,812.00 -5,06,109.00 0.923845 -4,67,566.48
5 -4,58,104.00 -34,193.00 4,66,925.00 -25,372.00 0.905731 -22,980.20
6 -4,58,104.00 -34,193.00 5,55,640.75 63,343.75 0.887971 56,247.44
7 -4,58,104.00 -34,193.00 6,61,212.49 1,68,915.49 0.870560 1,47,051.10
8 -4,58,104.00 -34,193.00 7,86,842.87 2,94,545.87 0.853490 2,51,392.06
9 -4,58,104.00 -34,193.00 9,36,343.01 4,44,046.01 0.836755 3,71,557.84
10 -6,29,893.00 -34,193.00 11,14,248.18 4,50,162.18 0.820348 3,69,289.78
11 -6,29,893.00 -34,193.00 13,25,955.34 6,61,869.34 0.804263 5,32,317.04
12 -6,29,893.00 -34,193.00 15,77,886.85 9,13,800.85 0.788493 7,20,525.74
13 -6,29,893.00 -34,193.00 18,77,685.35 12,13,599.35 0.773033 9,38,151.77
14 -6,29,893.00 -34,193.00 22,34,445.57 15,70,359.57 0.757875 11,90,136.30
15 -6,29,893.00 -34,193.00 26,58,990.23 19,94,904.23 0.743015 14,82,243.23
16 -6,29,893.00 -34,193.00 31,64,198.37 25,00,112.37 0.728446 18,21,196.39
17 -6,29,893.00 -34,193.00 37,65,396.06 31,01,310.06 0.714163 22,14,839.54
18 -6,29,893.00 -34,193.00 44,80,821.31 38,16,735.31 0.700159 26,72,323.01
19 -6,29,893.00 -34,193.00 53,32,177.36 46,68,091.36 0.686431 32,04,321.50
20 -6,29,893.00 -34,193.00 63,45,291.06 56,81,205.06 0.672971 38,23,288.15
21 -6,29,893.00 -34,193.00 75,50,896.37 68,86,810.37 0.659776 45,43,750.93
Net present worth 2,23,00,540.86
Equivalent annual worth = Present Worth * (A/P,2%, 21), (A/P,2%, 21) = 0.0587847
Annual Worth 13,10,930.60

Showing formula in excel

Year Invesetment Employee payment Utilities Profit Marketing costs Net Cash Flow Discount Factor Present value
0 -87985 =B2+C2+D2+E2+F2 =1/(1+0.02)^A2 =G2*H2
1 =8*-57263 -34193 -13812 =B3+C3+D3+E3+F3 =1/(1+0.02)^A3 =G3*H3
2 =8*-57263 -34193 -13812 =B4+C4+D4+E4+F4 =1/(1+0.02)^A4 =G4*H4
3 =8*-57263 -34193 -13812 =B5+C5+D5+E5+F5 =1/(1+0.02)^A5 =G5*H5
4 =8*-57263 -34193 -13812 =B6+C6+D6+E6+F6 =1/(1+0.02)^A6 =G6*H6
5 =8*-57263 -34193 466925 =B7+C7+D7+E7+F7 =1/(1+0.02)^A7 =G7*H7
6 =8*-57263 -34193 =E7*1.19 =B8+C8+D8+E8+F8 =1/(1+0.02)^A8 =G8*H8
7 =8*-57263 -34193 =E8*1.19 =B9+C9+D9+E9+F9 =1/(1+0.02)^A9 =G9*H9
8 =8*-57263 -34193 =E9*1.19 =B10+C10+D10+E10+F10 =1/(1+0.02)^A10 =G10*H10
9 =8*-57263 -34193 =E10*1.19 =B11+C11+D11+E11+F11 =1/(1+0.02)^A11 =G11*H11
10 =(8+3)*-57263 -34193 =E11*1.19 =B12+C12+D12+E12+F12 =1/(1+0.02)^A12 =G12*H12
11 =(8+3)*-57263 -34193 =E12*1.19 =B13+C13+D13+E13+F13 =1/(1+0.02)^A13 =G13*H13
12 =(8+3)*-57263 -34193 =E13*1.19 =B14+C14+D14+E14+F14 =1/(1+0.02)^A14 =G14*H14
13 =(8+3)*-57263 -34193 =E14*1.19 =B15+C15+D15+E15+F15 =1/(1+0.02)^A15 =G15*H15
14 =(8+3)*-57263 -34193 =E15*1.19 =B16+C16+D16+E16+F16 =1/(1+0.02)^A16 =G16*H16
15 =(8+3)*-57263 -34193 =E16*1.19 =B17+C17+D17+E17+F17 =1/(1+0.02)^A17 =G17*H17
16 =(8+3)*-57263 -34193 =E17*1.19 =B18+C18+D18+E18+F18 =1/(1+0.02)^A18 =G18*H18
17 =(8+3)*-57263 -34193 =E18*1.19 =B19+C19+D19+E19+F19 =1/(1+0.02)^A19 =G19*H19
18 =(8+3)*-57263 -34193 =E19*1.19 =B20+C20+D20+E20+F20 =1/(1+0.02)^A20 =G20*H20
19 =(8+3)*-57263 -34193 =E20*1.19 =B21+C21+D21+E21+F21 =1/(1+0.02)^A21 =G21*H21
20 =(8+3)*-57263 -34193 =E21*1.19 =B22+C22+D22+E22+F22 =1/(1+0.02)^A22 =G22*H22
21 =(8+3)*-57263 -34193 =E22*1.19 =B23+C23+D23+E23+F23 =1/(1+0.02)^A23 =G23*H23
Net present worth =SUM(I2:I23)
Equivalent annual worth = Present Worth * (A/P,2%, 21), (A/P,2%, 21) = 0.0587847
Annual Worth =0.0587847*I24

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