A manufacturing company is considering a capacity expansion investment at the co

Question

A manufacturing company is considering a capacity expansion investment at the cost of $70319 with no salvage value. The expansion would enable the company to produce up to 30,000 parts per year and the useful life of the additional capacity is seven years. Each part would generate $1.12 net profit and annual operating and maintenance costs are estimated at $7144 per year. The market demand for the parts is unlimited. All parts produced will be sold. The MARR of the firm is 10%.

What is the minimum annual production rate to make this investment justified?

Explanation / Answer

Answer: Calculation of the minimum annual production rate to make this investment justified:

Let X be the number of units produced:

AW = -$70319 (A/P, 10%, 7) - 7144 + 1.12X

Solve for x,

AW=-$70319(0.2054)-7144+1.12x

X=19274.57

The minimum annual production rate to make this investment justifiable is: 19274.57

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