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.

Solution

Computation of cash flow:

Year 2 and 3:

Cash inflow = Sales – expenses

               = $ 1,500,000 - $ 1,100,000 = $ 400,000

Year 4 through 10:

Cash inflow = Sales – expenses

                  = $ 2,500,000 - $ 1,100,000 = $1,400,000

Year 11:

Cash inflow = Sales – expenses + sales proceeds of building

                     = $ 2,500,000 - $ 1,100,000 + $ 3,000,000

                     = $ 4,400,000

Computation of present worth or NPV of project:

Year

Cash Flow

PV Factor calculation

PV Factor (F)

PV (= C x F)

0

($4,500,000)

1/(1+12%)^0

1

($4,500,000.00)

1

($3,500,000)

1/(1+12%)^1

0.892857143

($3,125,000.00)

2

$400,000

1/(1+12%)^2

0.797193878

$318,877.55

3

$400,000

1/(1+12%)^3

0.711780248

$284,712.10

4

$1,400,000

1/(1+12%)^4

0.635518078

$889,725.31

5

$1,400,000

1/(1+12%)^5

0.567426856

$794,397.60

6

$1,400,000

1/(1+12%)^6

0.506631121

$709,283.57

7

$1,400,000

1/(1+12%)^7

0.452349215

$633,288.90

8

$1,400,000

1/(1+12%)^8

0.403883228

$565,436.52

9

$1,400,000

1/(1+12%)^9

0.360610025

$504,854.03

10

$1,400,000

1/(1+12%)^10

0.321973237

$450,762.53

11

$4,400,000

1/(1+12%)^11

0.287476104

$1,264,894.86

NPV

($1,208,767.03)

As the present worth of the project is negative, we should not proceed with the project.

Year	Cash Flow	PV Factor calculation	PV Factor (F)	PV (= C x F)
0	($4,500,000)	1/(1+12%)^0	1	($4,500,000.00)
1	($3,500,000)	1/(1+12%)^1	0.892857143	($3,125,000.00)
2	$400,000	1/(1+12%)^2	0.797193878	$318,877.55
3	$400,000	1/(1+12%)^3	0.711780248	$284,712.10
4	$1,400,000	1/(1+12%)^4	0.635518078	$889,725.31
5	$1,400,000	1/(1+12%)^5	0.567426856	$794,397.60
6	$1,400,000	1/(1+12%)^6	0.506631121	$709,283.57
7	$1,400,000	1/(1+12%)^7	0.452349215	$633,288.90
8	$1,400,000	1/(1+12%)^8	0.403883228	$565,436.52
9	$1,400,000	1/(1+12%)^9	0.360610025	$504,854.03
10	$1,400,000	1/(1+12%)^10	0.321973237	$450,762.53
11	$4,400,000	1/(1+12%)^11	0.287476104	$1,264,894.86
			NPV	($1,208,767.03)