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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