2. A manufacturing company is considering a capacity expansion investment at the

Question

2. A manufacturing company is considering a capacity expansion investment at the cost of 250,000. The expansion would enable the company to produce up to 100,000 more parts and the useful life of the additional capacity is 7 years. Each part would generate $2 net profit and annual operating and maintenance costs are estimated at $25,000 per year. If the MARR of the firm is 10%, what is the minimum yearly production rate to make this investment justifiable? Assume a salvage value of 0. You must show correct work for full credit. a. b. c. d. Less than 37,000 Between 37,000 and 39,000 Between 39,000 and 42,000 Greater than 42,000

Explanation / Answer

2.

Correct Answer:

B. Between 37000 and 39000

Working note:

R = 10%

Time n = 7 years

Initial investment = $250000

Let, uniform annual cost of the investment = UAC

Then,

250000 = UAC*(1-1/(1+10%)^7)/.1

250000 = UAC*4.8684

UAC = 250000/4.8684

UAC = $51351.57

Annual O&M cost = $25000

So,

Total annual additional cost = UAC+ Annual O&M cost = 51351.57+25000 = $76351.57

Net profit per unit of the part = $2 per unit

Hence,

Minimum number of units required = Total annual additional cost / Net profit per unit

Minimum number of units required =76351.57/2

Minimum number of units required = 38175.79 or 38176 units

Hence, there is minimum annual production rate of 38176 units to make the investment to be justified.

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