6.2) A manufacturing company is considering a capacity expansion investment at t

Question

6.2) A manufacturing company is considering a capacity expansion investment at the cost of $251484 with no salvage value. The expansion would enable the company to produce up to 35827 parts per year and the useful life of the additional capacity is seven years. Each part would generate $3.36 net profit and annual operating and maintenance costs are estimated at $29058 per year. The market demand for the parts is unlimited, all parts produced will be sold. The MARR of the firm is 10%.

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

Explanation / Answer

First we know that the present value of the initial cost is -$251,484

We find the uniform annual cost of this present value:
nper = 7, rate = 0.1, PV = -251484
Using excel's pmt function:
=pmt(0.1,7,-251484)
AW = $51,656.20

So, the net annual worth must be at least $51,656.20 to make the overall PV at least zero.

We know the annual Operating and maintainence cost is $29,058.

so revenue must be at least $51,656.20 + $29,058 =$80,714.2

To have $80,714.2 in revenue, the minimum yearly production rate should be $80,714.2/$3.36
=24,022 units

Note- Kindly upvote the answer if you are satisfied with the response. Thanks.

Related Questions

Navigate

• Browse (All)
• Browse 6
• Subjects

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