Question
In: Accounting
ABC Manufacturing expects to sell 1,025 units of product in 2021 at an average price of...
| ABC Manufacturing expects to sell 1,025 units of product in 2021 at an average price of $100,000 each based on current demand. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The Chief Marketing Officer forecasts growth of 50 units per year through 2025. The $100,000 price will be constant for 5 years. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| However, ABC cannot produce more than 1,000 units annually. They must update plant or replace it. If replaced, initial working capital of $5 million is required. RRR is 14%. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Using excel functions, calculate NPV for both update and replace options.
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Solutions
Expert Solution
Option 1: Update
| Year | Initial Investment | Terminal Cash flow | Number of Unit | Contribution | Total Contribution | Cash flow | PV Factor @ 14% | Present Value |
| 0 | $ -115,000,000 | $ -115,000,000 | 1.00000 | $ - 115,000,000.00 | ||||
| 1 | 1,025 | $ 30,000 | $ 30,750,000 | $ 30,750,000 | 0.87719 | $ 26,973,684.21 | ||
| 2 | 1,075 | $ 30,000 | $ 32,250,000 | $ 32,250,000 | 0.76947 | $ 24,815,327.79 | ||
| 3 | 1,125 | $ 30,000 | $ 33,750,000 | $ 33,750,000 | 0.67497 | $ 22,780,288.67 | ||
| 4 | 1,175 | $ 30,000 | $ 35,250,000 | $ 35,250,000 | 0.59208 | $ 20,870,829.78 | ||
| 5 | $ 10,000,000 | 1,225 | $ 30,000 | $ 36,750,000 | $ 46,750,000 | 0.51937 | $ 24,280,485.06 | |
| $ 4,720,615.51 |
Option 2: Replace
| Year | Initial Investment | Working Capital | Number of Unit | Contribution | Total Contribution | Cash flow | PV Factor @ 14% | Present Value |
| 0 | $ -138,000,000 | $ -5,000,000 | $ -143,000,000 | 1.00000 | $ -143,000,000.00 | |||
| 1 | 1,025 | $ 40,000 | $ 41,000,000 | $ 41,000,000 | 0.87719 | $ 35,964,912.28 | ||
| 2 | 1,075 | $ 40,000 | $ 43,000,000 | $ 43,000,000 | 0.76947 | $ 33,087,103.72 | ||
| 3 | 1,125 | $ 40,000 | $ 45,000,000 | $ 45,000,000 | 0.67497 | $ 30,373,718.23 | ||
| 4 | 1,175 | $ 40,000 | $ 47,000,000 | $ 47,000,000 | 0.59208 | $ 27,827,773.04 | ||
| 5 | $ 5,000,000 | 1,225 | $ 40,000 | $ 49,000,000 | $ 54,000,000 | 0.51937 | $ 28,045,907.88 | |
| $ 12,299,415.15 |
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