Question

The Mowbot company wants to add a new product line. This will require spending $800,000 on new equipment and tooling. The new product line is expected to sell 1,600 units per year for five years. Each unit will generate $180 in gross profit. At the end of five years, the equipment will be sold for an estimated salvage value of $150,000.

The Mowbot company evaluates projects using a MARR of 18%. Use present worth analysis to show whether this is a viable project.

Answer 1

Ans: This project is viable.

Explanation:

Initial investment ( P ) = $800,000

Annual revenue or benefits ( A ) = 1600 * $180 = $288,000

Salvage value ( F ) = $150,000

Interest rate ( i ) = 18%

Number of interest period ( n ) = 5

Present worth = - P + A ( P /A , i ,n ) + F ( P/F , i ,n )

= -$800,000 + $288,000 ( P /A , 18% , 5 ) + $150,000 ( P/F , 18% , 5)

= -$180,000 + $288,000 ( 3.1272) + $150,000 (0.4371)

= -$180,000 + $900633.6 + $65565

= -$180,000 + $966198.6

= $786,198.6

Present worth of this project is positive . Therefore this project is viable.