Reference no: EM131878497
A company is considering constructing a plant to manufacture a proposed new product. The land costs is $300,000, the building costs $600,000, the equipment costs $250,000, and $100,000 additional working capital is required. It is expected the product will result in sales of $750,000 the first year increasing by 2% for the next 9 years. Expenses are estimated to total $475,000 the first year increasing by $1,000 each year for the next 9 years. At the end of 10 years it is estimated the land can be sold for $400,000, the building can be sold for $350,000, and the equipment sold for $50,000. At the EOY 10, the working capital will be recovered and returned to the company. The company’s MARR for all 10 years is 15%.
A) Draw your cash flow diagram.
B) Calculate the PW at MARR. Based on your calculations, should the company invest in the plant?
C) Calculate the AW at MARR. Based on your calculations, is your decision to invest in the plant the same or different?
D) Calculate the FW at MARR. Based on your calculations, is your decision to invest in the plant the same or different?
E) What is the IRR for this proposal? Use Excel and print and attach your solution. Based on your IRR is your decision to invest in the plant the same or different?
F) What is the ERR for this proposal when ?=MARR. Based on your calculations, is your decision to invest in the plantthe same or different?
G) Is IRR and ERR the same? If not why are they different?