Question

Assignment:
Complete the following problems. You must show your work on the math problems to get full credit. Every student is responsible for completing their own responses to the following problems.

1. Eastern Engineering has the following base-case estimates for a new small engine assembly project:

              Capital Investment = $15,000,000
              Fixed Costs = $3,250,000
              Variable Costs = $600 per unit
              Price per Unit = $1,000
              Demand = 20,000 units per year
Service Life = 12 years
              Salvage Value = $500,000
              MARR = 20%

Tax rate=0%

A) Find the net present worth, equivalent annual worth, and rate of return of this base-case scenario.
B) If demand for Eastern Engineering’s small engines were to be 17,000 instead of 20,000, how would the net present worth, equivalent annual worth, and rate of return compare to the base-case scenario? What if the demand was 23,000?
C) If the fixed costs were to be 20% lower, how would it affect the net present worth, equivalent annual worth, and rate of return of the project? What if the fixed costs were 20% higher?
D) If the variable costs were to be 15% lower, how would it affect the net present worth, equivalent annual worth, and rate of return of the project? What if the variable costs were 15% higher?

Answer 1

1.
Net present worth=-15000000+(20000*(1000-600)-3250000)/20%*(1-1/1.2^12)+500000/1.2^12=6142357.776

Equivalent annual worth=6142357.776*20%/(1-1/1.2^12)=1383658.009

Rate of return=RATE(12,(20000*(1000-600)-3250000),-15000000,500000)=No IRR

2.
Demand of 17000
Net present worth=-15000000+(17000*(1000-600)-3250000)/20%*(1-1/1.2^12)+500000/1.2^12=815297.705

Equivalent annual worth=815297.705*20%/(1-1/1.2^12)=183658.0089

Rate of return=RATE(12,(17000*(1000-600)-3250000),-15000000,500000)=21.435%

Demand of 23000
Net present worth=-15000000+(23000*(1000-600)-3250000)/20%*(1-1/1.2^12)+500000/1.2^12=11469417.85

Equivalent annual worth=11469417.85*20%/(1-1/1.2^12)=2583658.009

Rate of return=RATE(12,(23000*(1000-600)-3250000),-15000000,500000)=No IRR

3.
Fixed costs 20% lower

Net present worth=-15000000+(20000*(1000-600)-3250000*0.8)/20%*(1-1/1.2^12)+500000/1.2^12=9027848.648

Equivalent annual worth=9027848.648*20%/(1-1/1.2^12)=2033658.009

Rate of return=RATE(12,(23000*(1000-600)-3250000*0.8),-15000000,500000)=No IRR

Fixed costs 20% higher

Net present worth=-15000000+(20000*(1000-600)-3250000*1.2)/20%*(1-1/1.2^12)+500000/1.2^12=3256866.904

Equivalent annual worth=3256866.904*20%/(1-1/1.2^12)=733658.0088

Rate of return=RATE(12,(23000*(1000-600)-3250000*1.2),-15000000,500000)=No IRR

4.
Variable costs 15% lower

Net present worth=-15000000+(20000*(1000-600*0.85)-3250000)/20%*(1-1/1.2^12)+500000/1.2^12=14132947.88

Equivalent annual worth=14132947.88*20%/(1-1/1.2^12)=3183658.008

Rate of return=RATE(12,(20000*(1000-600*0.85)-3250000),-15000000,500000)=No IRR

Variable costs 15% higher

Net present worth=-15000000+(20000*(1000-600*1.15)-3250000)/20%*(1-1/1.2^12)+500000/1.2^12=-1848232.331

Equivalent annual worth=-1848232.331*20%/(1-1/1.2^12)=-416341.9912

Rate of return=RATE(12,(20000*(1000-600*1.15)-3250000),-15000000,500000)=16.659%