Question

Your company is considering a $500,000 investment, today, in a new production facility. Production would commence two years from today and initial revenues would be realized at the end of the first year of production. Revenues are estimated to be $300,000 for the first production year, but are expected to fall $30,000 each year thereafter because of a forecasted decline in demand. Meanwhile, operating expenses are incurred at the beginning of each production year and are estimated to be $80,000 for the first production year. Operating expenses are forecasted to increase thereafter at a compound rate of 4% p.a. After five years of production, the facility would be shut down and sold for a residual salvage value equal to 10% of its original capital investment. If your firm's MARR is 10% p.a., what is the present worth of this opportunity? Should your company invest in this facility?

Answer 1

Answers present worth of the opportunity page: 01 company investment $ 500000 Estimated revenue = $ 300000 Estimated prodution = $ 80000 present worth formula Ax (1-C17959/61479) /609) 4 g comelic Series present cost o odm expenses = $80000 + 80000 X 1,04x (1.04x[1-C140.044 (1+0,0%)6.10.10 = 80000 + 80000 x 1.04x[1-(1.044/61.134]/(0.06) = 80000 € 80000 X 1,04 x 3.34951438 = 80000 + 278679.59 358679.60 Now 500000 – 358679.60+ 300000 x (pla 10:1,5) - 30000k (p/9,107.5) +0.1X 500000 X (PLF, 101.5) From compound interest table we have the values of (PIA, 101,5) - 3.991, (play,101,5) = 6.862, (PlF, 104,5)0,6209 - 500000 - 358679.60+300000X 3,791 - 30000X 6.862 +0.1 X 500000 X 0.6209 -858679.6+ 1137300 - 205860 + 31045 103805.40 company invest in this facility As Npw is positive, company should invest SO, NOW pipw should