Bottled water continues to be a hot market. The ClearWater bottling company has

Question

Bottled water continues to be a hot market. The ClearWater bottling company has decided to introduce Sparkle, a new line of bottled water. ClearWater expects to manufacture 10,000 bottles of Sparkle every day, 365 days per year.

It will cost ClearWater $5,000,000 for manufacturing equipment to produce Sparkle. The variable manufacturing cost for each bottle of Sparkle will be $0.25 the first year. This price is expected to increase at a geometric rate of 8% every year, e.g. variable cost per bottle in year 2 = $0.25 * ( 1 + .08) ^ 1 = $0.27, year 3 = $0.2916 and so on. Annual, fixed costs are $1,000,000. Assume that fixed and variable manufacturing costs occur at the end of each year.

Each bottle of Sparkle results in an income of $1.00. Assume that every bottle manufactured in a year is sold in the same year.

Sparkle is expected to have a 10-year life, at which time the manufacturing equipment will have a salvage value of $650,000.

Use an MARR of 12% per year compounded annually to determine the Net Present Worth of manufacturing Sparkle. Use a 10-year study period. Include the initial cost of the equipment, annual manufacturing costs, annual income and the salvage value of the equipment.

Explanation / Answer

Calculation of NPV of the Project Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Sales (Units ) 10000*365 3650000 3650000 3650000 3650000 3650000 3650000 3650000 3650000 3650000 3650000 Income (Units *$1) (A) $ 3,650,000.00 $ 3,650,000.00 $ 3,650,000.00 $ 3,650,000.00 $ 3,650,000.00 $ 3,650,000.00 $ 3,650,000.00 $ 3,650,000.00 $ 3,650,000.00 $ 3,650,000.00 Variable cost per unit 0.2500 0.2700 0.2916 0.3149 0.3401 0.3673 0.3967 0.4285 0.4627 0.4998 (0.2500*108%) (0.2700*108%) (0.2916*108%) (0.3149*108%) (0.3673*108%) (0.3967*108%) (0.4285*108%) (0.4627*108%) (0.4998*108%) Variable cost =(Units * VC per unit) (B) $      912,500.00 $      985,500.00 $ 1,064,340.00 $ 1,149,487.20 $ 1,241,446.18 $ 1,340,761.87 $ 1,448,022.82 $ 1,563,864.65 $ 1,688,973.82 $ 1,824,091.72 Annual Fixed Cost (C) $ 1,000,000.00 $ 1,000,000.00 $ 1,000,000.00 $ 1,000,000.00 $ 1,000,000.00 $ 1,000,000.00 $ 1,000,000.00 $ 1,000,000.00 $ 1,000,000.00 $ 1,000,000.00 Net operating cash flows (D)= (A-B-C) $ 1,737,500.00 $ 1,664,500.00 $ 1,585,660.00 $ 1,500,512.80 $ 1,408,553.82 $ 1,309,238.13 $ 1,201,977.18 $ 1,086,135.35 $      961,026.18 $      825,908.28 Initial Cost (E) $      (5,000,000.00) Salvage value (F) $      650,000.00 Net cash flows (G) =(D+E+F) $      (5,000,000.00) $ 1,737,500.00 $ 1,664,500.00 $ 1,585,660.00 $ 1,500,512.80 $ 1,408,553.82 $ 1,309,238.13 $ 1,201,977.18 $ 1,086,135.35 $      961,026.18 $ 1,475,908.28 PVF(12%) (H)                      1.00000                0.89286                0.79719                0.71178                0.63552                0.56743                0.50663                0.45235                0.40388                0.36061                0.32197 PV = G*H $      (5,000,000.00) $ 1,551,339.29 $ 1,326,929.21 $ 1,128,641.47 $      953,603.01 $      799,251.27 $      663,300.78 $      543,713.43 $      438,671.85 $      346,555.68 $      475,202.97 Net present worth (Sum of PVs) $        3,227,208.95

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