15 pts The manufacturing facility where you work wants to bu

(15 pts) The manufacturing facility where you work wants to build a duplicate assembly line in an old warehouse next door to the current facility. The increased sales generated by the additional line are expected to last for 10 years once they are operational. However, production will not begin until year 2. New sales are expected to be $1.5 Million in years 2 and 3, and $2.5 Million each year after through year 11 Operating and maintenance expenses to operate the line are expected to be $1.1 Million each year after the line begins production. At the end of the 11th year, you can salvage the equipment and sell the building for $3 Million. It will cost $4.5 Million to purchase the building initially in year 0, and $3.5 Million in year 1 to retrofit it to accommodate your production needs before production begins in year 2. Your firm\'s MARR-12%. Use the Present Worth Criterion to determine if you should proceed with this project? 1. 2

Solution

Year

0

1

2

3

4

5

6

7

8

9

10

11

purchase of building

-4.5

retrofit of machine

-3.5

sales

1.5

1.5

2.5

2.5

2.5

2.5

2.5

2.5

2.5

2.5

less operating expenses

1.1

1.1

1.1

1.1

1.1

1.1

1.1

1.1

1.1

1.1

operating profit

0.4

0.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

salvage value of building

3

net operating cash flow

-4.5

-3.5

0.4

0.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

4.4

present value factor at 12% = 1/(1+r)^n r= 12%

1

0.892857

0.797194

0.71178

0.635518

0.567427

0.506631

0.452349

0.403883

0.36061

0.321973

0.287476

present value of net operating cash flow = net operating cash flow*present value factor

-4.5

-3.125

0.318878

0.284712

0.889725

0.794398

0.709284

0.633289

0.565437

0.504854

0.450763

1.264895

NPV = sum of present value of cash flow

-1.20877

No we should not proceed with the idea as its results in negative present worth

Year	0	1	2	3	4	5	6	7	8	9	10	11
purchase of building	-4.5
retrofit of machine		-3.5
sales			1.5	1.5	2.5	2.5	2.5	2.5	2.5	2.5	2.5	2.5
less operating expenses			1.1	1.1	1.1	1.1	1.1	1.1	1.1	1.1	1.1	1.1
operating profit			0.4	0.4	1.4	1.4	1.4	1.4	1.4	1.4	1.4	1.4
salvage value of building												3
net operating cash flow	-4.5	-3.5	0.4	0.4	1.4	1.4	1.4	1.4	1.4	1.4	1.4	4.4
present value factor at 12% = 1/(1+r)^n r= 12%	1	0.892857	0.797194	0.71178	0.635518	0.567427	0.506631	0.452349	0.403883	0.36061	0.321973	0.287476
present value of net operating cash flow = net operating cash flow*present value factor	-4.5	-3.125	0.318878	0.284712	0.889725	0.794398	0.709284	0.633289	0.565437	0.504854	0.450763	1.264895
NPV = sum of present value of cash flow	-1.20877
No we should not proceed with the idea as its results in negative present worth