a) The ahove tahle shows the future operating ed at the end of each of the respe

Question

a) The ahove tahle shows the future operating ed at the end of each of the respective years. Reterat is the net present from an investment. The future operating profits are heInvestment s. Refer to the table above. If the discount rate (Interest rate) is 3) Sam's INC io producing forty lawn-mowers at a total cost of $so,000 and tstaree each for a total revenue of 86o,00o. If it produces a forty-first mower, Imower? (4points) and its total cost will be $51,200. Should Sam's INC produce the forty-first law cost of $50,00o and is selling them for $1.500 its total revenue will be $61 500

Explanation / Answer

ANSWER:

For 1st 40 lawn mowers his profit is revenue - cost = $60,000 - $50,000 = $10,000

For producing 41 lawn mowers his profit will be revenue - cost = $61,500 - $51,200 = $10,300

so his profit will increase by $300.

now lets see what his internal rate of return will be for both the scenarios.

irr for 40 lawn mowers will be found by putting pv to zero.

let n be 1

pv = initial investment + revenue(p/f,i,n)

0 = -50,000 + 60,000(p/f,i,1)

50,000 = 60,000(p/f,i,1)

50,000 / 60,000 = (p/f,i,1)

0.8333 = (p/f,i,1)

lokking in compounding we get i = 20%

so our irr is 20% for 1st 40 lawn mowers produced.

now we look at the irr if 41 lawn mowers are produced.

let n be 1

pv = initial investment + revenue(p/f,i,n)

0 = -51,200 + 61,500(p/f,i,1)

51,200 = 61,500(p/f,i,1)

51,200 / 61,500 = (p/f,i,1)

0.8325 = (p/f,i,1)

lokking in compounding we get i = 20.12%

so our irr is 20.12% for 41 lawn mowers produced.

since the irr has increased and the profit has also increased , therefore it would be ok to produce the 41st lawn mower.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.