Question

A company is considering constructing a plant to manufacture a proposed new product. 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 EOY 10. The annual expenses for labor, materials, and all other items are estimated to total $475,000. If the company requires a MARR of 15% per year on projects of comparable risk, determine if it should invest in the new product line. Use the AW method.

Answer 1

Answer:

The answer is "$ 70,245".

Explanation:

Annual value:  

By using the following formula, capital expenditure can be calculated:  

$Investing \ capital = -LC- BC -EC -WC \\\\LC = \text{cost of land}\\ BC = \text{cost of construction}\\ EC = \text{cost of equipment} \\WC = \text{working capital}$  

In the above equation, substitute the respective values as follows:

$capital = -\ 300,000- \ 600,000- \ 250,000-\ 100,000$

$= - 1,250,000$

The anticipated annual revenues or sales are at $750,000.  

The following formula can be used to calculate the market value:  

$=SL+SB+SE$

Where,

$SL = \text{Land sale price}\\\\ SB = \text{Construction market price}\\\\ SE = \text{equipment sales price}$

Replace the respective values in the equation of market value as follows:  

$Market \ value = 400,000+350,000+50,000$

                       $=800,000$

Annual value calculation:  

Calculation of the annual value is as follows:

$= 750,000-475,000-1,250,000(\frac{i(1+i)^n}{(1+i)^n-1}) +900,000\frac{i}{(1+i)^n-1}\\\\\text{ by solving the above value the answer is: }\\\\=70.245$

Answer 2

Costs are termed as the expenses or the price that the firm incurs from the process of manufacturing the raw material to the process of availing goods and services or the final finished product to the customer in the market at the prevailing and the affordable price.

The total annual value to get invested is "$ 70,245".

Calculation of the Capital Expensiture:

$\text{Investing Capital}= -LC-BC-EC-WC$

LC= cost of land

BC= cost of construction

EC= cost of equipment

WC= working capital

$\text{Investing Capital}= -LC-BC-EC-WC$

$=-\ 300000-\ 600000-\ 250000-\ 100000$

=-1250000

The anticipated annual revenues or sales are at $750,000.  

Calculation of the market value:

Market value= $SL+SB+SE$

SL = land sale price

SB= construction market price

SE= equipment sale price

Market price= $SL+SB+SE$

=400000+350000+50000

= 800000

Calculation of Annual value:

$750000-475000-1250000\frac{i(1+i)^{10} }{(1+i)^{10} -1} +900000\times\frac{i}{(1+i)^{10}-1 }$

After the calculation of the above formula or simplifying it,

The final answer is $ 70245.

To know more about the calculation of the annual value, refer to the link below:

https://brainly.com/question/6444704