Management is trying to decide whether or not to build a new factory. They believe sales are increasing for their products. They have estimated revenues of $85,000 in year one, $70,000 in years two through ten. In 10 years the factory is obsolete. They estimate expenses annually to operate the factory after year 1 would be $30,000. The cost of the new factory is $450,000. The payments required are $120,000 immediately with the remainder due at completion. The company has hurdle rate of 10%. Use these tables to solve the problems. a. What is the net present value of this new factory? b. What would the net present value be if the factory only produces goods for 9 years?
Management is trying to decide whether or not to build a new factory. They believe sales are increasing for their products. They have estimated revenues of $85,000 in year one, $70,000 in years two through ten. In 10 years the factory is obsolete. They estimate expenses annually to operate the factory after year 1 would be $30,000. The cost of the new factory is $450,000. The payments required are $120,000 immediately with the remainder due at completion. The company has hurdle rate of 10%. Use these tables to solve the problems. a. What is the net present value of this new factory? b. What would the net present value be if the factory only produces goods for 9 years?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Use the below tables to solve the problem.
Transcribed Image Text:Present value of S1
10% 12%
0.962 0.943 0.926 0.909 0.893 0.877 0.862 0.847 0.833
0.925 0.890 | 0.857 0.826 | 0.797 0.769 0.743 0.718 0.694
0.889 0.840 | 0.794 | 0.751 0.712 0.675 | 0.641 | 0.609 0.579
0.855 0.792 0.735 | 0.683 0.636 | 0.592 0.552 0.516 | 0.482
0.822 0.747 0.681 | 0.621 0.567 0.519 0.476 0.437 0.402
0.790 0.705 | 0.630 | 0.564 0.507 0.456 | 0.410 0.370 | 0.335
0.760 0.665 0.583 0.513 0.453 0.400 0.354 0.314 0.279
0.731 0.627 0.540 0.467 0.404 0.351 0.305 0.266 0.233
0.703 0.592 0.500 0.424 0.361 0.308 0.263 0.225 0.194
0.676 0.558 0.463 | 0.386 0.322 | 0.270 0.227 0.191 | 0.162
Periods
4%
6%
8%
14% 16% 18%
20%
1
2
3
4
6
7
9
10
Present value of an annuity
Periods
4%
6%
8% 10% 12% 14% 16% 18% 20%
0.962 0.943 | 0.926 | 0.909 0.893 0.877 0.862 0.847 0.833
1.886 1.833 | 1.783 | 1.736 | 1.690 | 1.647| 1.605 1.566 1.528
2.775 2.673| 2.577 2.487 2.402 2.322 | 2.246 2.174 2.106
3.630 3.465 | 3.312 | 3.170 | 3.037 2.914 | 2.798
4.452 4.212 3.993 | 3.791 | 3.605 3.433 3.274 3.127 2.991
5.242 4.917 4.623 | 4.355 | 4.111 3.889 | 3.685 3.498 3.326
6.002 5.582 | 5.206 4.868 | 4.564 4.288 4.039 | 3.812 3.605
6.733 6.210 | 5.747 5.335 | 4.968 | 4.639 | 4.344 | 4.078 3.837
7.435 6.802 | 6.247 | 5.759 | 5.328 4.946| 4.607 4.303 4.031
8.111 7.360 | 6.710 | 6.145 | 5.650 5.216 | 4.833 4.494 4.192
1
2
3
4
2.69 2.589
5
7
9
10
Transcribed Image Text:Management is trying to decide whether or not to build a new factory. They believe sales are
increasing for their products. They have estimated revenues of $85,000 in year one, $70,000 in
years two through ten. In 10 years the factory is obsolete.
They estimate expenses annually to operate the factory after year 1 would be $30,000.
The cost of the new factory is $450,000. The payments required are $120,000 immediately with
the remainder due at completion.
The company has hurdle rate of 10%.
Use these tables to solve the problems.
a. What is the net present value of this new factory?
b. What would the net present value be if the factory only produces goods for 9 years?
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