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In: Finance

You are thinking of making an investment in a new factory. The factory will generate revenues...

You are thinking of making an investment in a new factory. The factory will generate revenues of $ 1 ,510, 000 per year for as long as you maintain it. You expect that the maintenance costs will start at $ 77 ,010 per year and will increase 4 % per year thereafter. Assume that all revenue and maintenance costs occur at the end of the year. You intend to run the factory as long as it continues to make a positive cash flow​ (as long as the cash generated by the plant exceeds the maintenance​ costs). The factory can be built and become operational immediately and the interest rate is 5 % per year. a. What is the present value of the​ revenues? b. What is the present value of the maintenance​ costs? c. If the plant costs $ 15 ,100 , 000 to​ build, should you invest in the​ factory?

Solutions

Expert Solution

Year Revenue Cost Net earning NPV of Revenue NPV of manufacturing cost
1 1510000 77010 1432990 29459338 3979704
2 1510000 80090.4 1429910
3 1510000 83294.02 1426706
4 1510000 86625.78 1423374
5 1510000 90090.81 1419909
6 1510000 93694.44 1416306
7 1510000 97442.22 1412558
8 1510000 101339.9 1408660
9 1510000 105393.5 1404606
10 1510000 109609.2 1400391
11 1510000 113993.6 1396006
12 1510000 118553.4 1391447
13 1510000 123295.5 1386705
14 1510000 128227.3 1381773
15 1510000 133356.4 1376644
16 1510000 138690.7 1371309
17 1510000 144238.3 1365762
18 1510000 150007.8 1359992
19 1510000 156008.1 1353992
20 1510000 162248.5 1347752
21 1510000 168738.4 1341262
22 1510000 175487.9 1334512
23 1510000 182507.4 1327493
24 1510000 189807.7 1320192
25 1510000 197400.1 1312600
26 1510000 205296.1 1304704
27 1510000 213507.9 1296492
28 1510000 222048.2 1287952
29 1510000 230930.1 1279070
30 1510000 240167.3 1269833
31 1510000 249774 1260226
32 1510000 259765 1250235
33 1510000 270155.6 1239844
34 1510000 280961.8 1229038
35 1510000 292200.3 1217800
36 1510000 303888.3 1206112
37 1510000 316043.8 1193956
38 1510000 328685.6 1181314
39 1510000 341833 1168167
40 1510000 355506.3 1154494
41 1510000 369726.6 1140273
42 1510000 384515.7 1125484
43 1510000 399896.3 1110104
44 1510000 415892.1 1094108
45 1510000 432527.8 1077472
46 1510000 449828.9 1060171
47 1510000 467822.1 1042178
48 1510000 486535 1023465
49 1510000 505996.4 1004004
50 1510000 526236.2 983763.8
51 1510000 547285.7 962714.3
52 1510000 569177.1 940822.9
53 1510000 591944.2 918055.8
54 1510000 615622 894378
55 1510000 640246.8 869753.2
56 1510000 665856.7 844143.3
57 1510000 692491 817509
58 1510000 720190.6 789809.4
59 1510000 748998.2 761001.8
60 1510000 778958.2 731041.8
61 1510000 810116.5 699883.5
62 1510000 842521.2 667478.8
63 1510000 876222 633778
64 1510000 911270.9 598729.1
65 1510000 947721.7 562278.3
66 1510000 985630.6 524369.4
67 1510000 1025056 484944.2
68 1510000 1066058 443941.9
69 1510000 1108700 401299.6
70 1510000 1153048 356951.6
71 1510000 1199170 310829.7
72 1510000 1247137 262862.9
73 1510000 1297023 212977.4
74 1510000 1348904 161096.5
75 1510000 1402860 107140.3
76 1510000 1458974 51025.94

jeff jeffy answered 1 year ago
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