The land costs $300,000, the building costs $600,000, the equipment costs $250,0
ID: 2743931 • Letter: T
Question
The land costs $300,000, the building costs $600,000, the equipment costs $250,000, and $100,000 additional working capital is required. It is expected that the product will result in sales of $750,000 per year for 10 years, at which time the land can be sold for $400,000, the building for $350,000, and the equipment for $50,000. All of the working capital would be recovered at the end of year 10. The annual expenses for labor, materials, and all other items are estimated to total $475,000 per year. The company requires a MARR of 15% per year on projects of comparable risk. What is the present worth of the investment?
$2568.70
$4,680.30
$3,526.50
-$3,680.30
a.$2568.70
b.$4,680.30
c.$3,526.50
d.-$3,680.30
Explanation / Answer
The correct answer is c. $ 3,526.50
Initial investment = $ ( 300,000 + 600,000 + 250,000 + 100,000) = $ 1,250,000
Annual cash flows = $ ( 750,000 - 475,000) = $ 275,000
Present value of annual cash inflows at 1% discount rate = $ 275,000 x 5.0188 = $ 1,380,170
Present value of terminal cash flows = 900,000 x 0.2472 = $ 222,480
Total present worth of the cash inflows = $ ( 1,380,170 + 222,480) = $ 1,602,650
Net present worth = 1,602,650 - 1,250,000 = $ 352,650
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