Question

A company is considering constructing a plant to manufacture a proposed new product. The land costs $300,000, the building costs $600,000, the equipment costs $250,000, and $100,000 additional working capital is required. It is expected that the product will result in sales of $750,000 per year for 10 years, at which time the land can be sold for $400,000, the building for $350,000, and the equipment for $50,000. All of the working capital would be recovered at the EOY 10. The annual expenses for labor, materials, and all other items are estimated to total $475,000. If the company requires a MARR of 15% per year on projects of comparable risk, determine if it should invest in the new product line. Use the AW method. (Sullivan, 20180327, p. 234) Sullivan, W. G., Wicks, E. M., Koelling, C. P. (20180327). Engineering Economy, 17th Edition. [[VitalSource Bookshelf version]]. Retrieved from vbk://9780134838229 Always check citation for accuracy before use.

Answer 1

Answer:

$327,909.14

Explanation:

Calculation to determine if it should invest in the new product line.

First step

The Investment cost will be:

Land costs $300,000

Building costs $600,000

Equipment costs $250,000

Additional working capital $100,000

=$1,250,000

Annual revenue $750,000

Annual expenses$475,000

Market value:

$400,000 +$350,000 + $50,000 = $80,0000

N: 10 year

MARR: 15% per year

Using PW method

-$1250000 + ($750,000 – $475,000) (P/A, 15%, 10) +$ 80000(P/F, 15%, 10)

-$1250000-$275,000((1+15)^¹⁰−1/15(1+15)^¹⁰+$3000

Hence,

=-$1,250,000 – $275,000(5.0188) + $3000(0.2472)

= $327,909.14