Reference no: EM132875079
Our company has been mainly producing parts for cars with combustion engines. We are facing a challenging time. Potential shifting trends towards electric automobiles had apparently caused a reduction in our demand, that has been decreasing during the last years.
In order to adapt to the future circumstances, the following different scenarios are being considered:
- Changing the production line to adapt to the electric automobile market.
- Investing in different projects to adapt to the new situation.
- Selling the company before facing severe losses.
After these previous calculations, the project still requires a big initial investment, and other options are being considered. Another project, that consists of just readjusting some parts to adapt them to assemble to electric cars, would produce net revenues of $200,000 per year, for 10 years. Assuming that these revenues will grow at a constant 1% per year, and are assessed at a cost of capital of 2,5%:
Problem a) Would it still be profitable if it required an initial investment of $1,500,000?
Problem b) If we take these annual revenues of $200,000 growing at a 1% per year, and we invest them in a bank account that offers an annual rate of 5% for 10 years, how much will we have at the end?
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