Question

A company is considering constructing a plant to manufacture a proposed new product. The land costs $350,000​, the building costs $500,000​, the equipment costs $250,000​, and $80,000 additional working capital is required. It is expected that the product will result in sales of $750,000 per year for 8 ​years, at which time the land can be sold for $350,000​, the building for $350,000​, and the equipment for $40,000.All of the working capital would be recovered at the EOY 8.The annual expenses for​ labor, materials, and all other items are estimated to total $425,000.

If the company requires a MARR of 13​%

per year on projects of comparable​ risk, determine if it should invest in the new product line. Use the AW method.

Answer 1

Land cost = 350000

Building cost = 500000

Equipment cost = 250000

Working capital = 80000

Annual revenue = 750000

Annual expenses = 425000

Salvage value of land = 350000

Salvage value of building = 350000

Salvage value of equipment = 40000

Recovery of working capital = 80000

Time period = 8 years

MARR = 13%

Calculate Annual Worth -

AW = -350000(A/P, 13%, 8) - 500000(A/P, 13%, 8) - 250000(A/P, 13%, 8) - 80000(A/P, 13%, 8) + 750000 - 425000 + 350000(A/F, 13%, 8) + 350000(A/F, 13%, 8) + 40000(A/F, 13%, 8) + 80000(A/F, 13%, 8)

AW = [-350000 * 0.2084] - [500000 * 0.2084] - [250000 * 0.2084] - [80000 * 0.2084] + 750000 - 425000 + [350000 * 0.0784] + [350000 * 0.0784] + [40000 * 0.0784] + [80000 * 0.0784]

AW = -72940 - 104200 - 52100 - 16672 + 750000 - 425000 + 27440 + 27440 + 3136 + 6272

AW = 143376

The annual worth of the investment is $143,376.

The annual worth is positive.

So,

Company should invest in the new product line.