What is maximum amount that your company can afford to spend

Reference no: EM13199587

Your company manufactures widget parts for various commercial products. Design changes in part of the product line, which are expected to increase sales, will require changes in the manufacturing operation. The cost basis for the new equipment required is $200,000 (MACRS five-year property class). Increased annual revenues, in year zero dollars, are estimated to be $350,000. Increased annual expenses, in year zero dollars, are estimated to be $200,000. The estimated market value of equipment in nominal (actual) dollars at the end of the six-year analysis period is $30,000. General price inflation is estimated at 5% per year; the total escalation rate on annual revenues is 2.5%; and for annual expenses it is 5.5%; the after-tax MARR (in market terms) is 10% per year; and the tax rate, t = 40%.

a. Based on an after-tax, nominal (actual) dollar analysis, what is the maximum amount that your company can afford to spend on the total project (i.e., changing the manufacturing operations)? Use the PW method of analysis.

Reference no: EM13199587

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