Homework Answers
The cash inflows and outflows associated with the investment is shown in the table below
| Year | Investment | Annual savings in materials and quality inspection | Incremental annual expenses | Incremental annual income taxes | Salvage value |
| 0 | -500000 | ||||
| 1 | -2200000 | 5000000 | -1500000 | -800000 | 0 |
| 2 | 0 | 5000000 | -1500000 | -800000 | 0 |
| 3 | 0 | 5000000 | -1500000 | -800000 | 0 |
| 4 | 0 | 5000000 | -1500000 | -800000 | 0 |
| 5 | 0 | 5000000 | -1500000 | -800000 | 0 |
| 6 | 0 | 5000000 | -1500000 | -800000 | 0 |
| 7 | 0 | 5000000 | -1500000 | -800000 | 0 |
| 8 | 0 | 5000000 | -1500000 | -800000 | 1,500,000 |
The net present worth of the project is calculated as follows:-
NPW = - $ 500,000 - $2,200,000 (P/F, 15% , 1 year) + $ 5,000,000 ( P/A, 15%, 8 years) - $ 1,500,000 ( P/A, 15%, 8 years) - $ 800,000 ( P/A, 15%, 8 years) + $ 1,500,000 ( P/F, 15% , 8 years)
NPW = - $ 500,000 - $2,200,000 x 0.8696 + $ 5,000,000 x 4.4873 - $ 1,500,000 x 4.4873 - $ 800,000 x 4.4873 + $ 1,500,000 x 0.3269
NPW = $ 10,192,940
The economic worth of producing the headsets in house is $ 10,192,940
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