Thank you for the help! I\'m unsure of how to come to the final answer. A compan

Question

Thank you for the help! I'm unsure of how to come to the final answer.

A company is considering constructing a plant to manufacture a proposed new product. The land costs $300, 000, the building costs $650, 000, the equipment costs $200, 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 8 years, at which time the land can be sold for $450, 000, the building for $300, 000, and the equipment for $50, 000. All of the working capital would be recovered at the EOY 8. The annual expenses for labor, materials, and all other items are estimated to total $425, 000. If the company requires a MARR of 13% per year on projects of comparable risk, determine if it should invest in the new product line. Use the AW method. Click the icon to view the interest and annuity table for discrete compounding when the MARR is 13% per year. The AW is $| (Round to the nearest dollar.)

Explanation / Answer

AW = R - E - CR, here R = $900000, E = $425000

calculation CR; Assuming a uniform loss in asset values in 8 years so (1300000 - 950000)/8 = $43750

From the below table it can be seen that PW of CR = 942648

Annual equivalent of CR = 942648(A/P,13%,8) = $196435

So AW = 900000-425000-196435 = $278565

Year Value of investment at BOY Loss in value in year Interest per tear at BOY CR cost for year Present worth of CR cost 1 1300000 43750 169000 212750 188274.34 2 1256250 43750 163312.5 207062.5 162160.31 3 1212500 43750 157625 201375 139562.98 4 1168750 43750 151937.5 195687.5 120018.81 5 1125000 43750 146250 190000 103124.39 6 1081250 43750 140562.5 184312.5 88528.71 7 1037500 43750 134875 178625 75926.46 8 993750 43750 129187.5 172937.5 65052.15 Total CR 942648

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