Complete question :
A company is considering constructing a plant to manufacture a proposed new product. The land costs $350,000, the building costs $600,000, the equipment costs $250,000, and $150,000 additional working capital is required. It is expected that the product will result in sales of $900,000 per year for 10 years, at which time the land can be sold for $450,000, the building for $400,000, 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 $500,000. 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.
Answer: $182,800
Explanation:
Given the following :
land costs = $350,000
building costs = $600,000
equipment costs = $250,000
additional working capital = $150,000
Expected sales per year for 10 years = $900,000
Salvage value After (10years):
Cost of land = $450,000
Building = $400,000
Equipment = $50,000
All working capital will be recovered at end of year, Hence, working capital will be $150,000
Annual expenses = $500,000
MARR = 15% per annum
Total amount invested = $(350,000 + 600,000 + 250,000 + 150,000) = $1,350,000
Expected sales per Annum = annual revenue = $900,000
Expenditure per year = $500,000
Net income = Revenue - Expenditure
Net income = $900,000 - $500,000 = $400,000
Worth or valuation of investment after 10 years :
($450,000 + $50,000 + $400,000 + $150,000)
= $1,050,000
Hence,
Capital recovery factor : (A/P, 15%, 10) = 0.199
Sinking fund table : (A/F, 15%, 10) =0.049
NET ANNUAL WORTH :
-Initial investment(A/P, 15%, 10) + annual net income + salvage value(A/F, 15%,10)
= - 1,350,000(0.199) + 400,000 + 1,050,000(0.049)
= $182,800
The investment is economically justified as the net annual worth yields a positive value.
