U.S. Steel is considering a plant expansion to produce austenitic, precipitation

Question

U.S. Steel is considering a plant expansion to produce austenitic, precipitation hardened, duplex, and martensitic stainless steel round bars that is expected to cost $14 million now and another $10 million 1 year from now. If total operating costs will be $1.5 million per year starting 1 year from now, and the estimated salvage value of the plant is virtually zero, how much must the company make annually in years 1 through 11 to recover its investment plus a return of 17% per year?

The company must make $  million annually in years 1 through 11 to recover its investment plus a return of 17% per year

Explanation / Answer

Plant expansion is expected to cost $14 million now and another $10 million 1 year from now with annual operating costs being $1.5 million per year and a salvage value of zero. Annual income in years 1 through 11 to recover its investment plus a return of 17% per year is given by

Annual income = Annual cost = (14 million + 10 million (1 + 17%)^-1 + 1.5 million x (P/A, 17%, 11))(A/P, 17%, 11)

= (14,000,000 + 10,000,000*(1 + 17%)^-1 + 1,500,000*4.836413)*(0.206765)

= $6,161,933

Hence the ompany must make $6.162 million annually in years 1 through 11 to recover its investment plus a return of 17% per year

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