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A firm has installed a manufacturing line for packing materials. The firm plans to produce 45...

A firm has installed a manufacturing line for packing materials. The firm plans to produce 45 tons of packing peanuts at $4,000 per ton annually for 3 years, and then 60 tons of packing peanuts per year at $5,000 per ton for the next 5 years. What is the present worth of the expected outcome? Assume the firm’s interest rate is 15% annually.

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Answer #1

Annual Production in first 3 years = $4,000 * 45 = $180,000

Annual Production in next 5 years = $5,000 * 60 = $300,000

PV of expected outcome = [CF(i) / (1 + r)i]

= [$180,000 / (1+0.15)] + [$180,000 / (1+0.15)2] + [$180,000 / (1+0.15)3] + [$300,000 / (1+0.15)4] + [$300,000 / (1+0.15)5] + [$300,000 / (1+0.15)6] + [$300,000 / (1+0.15)7] + [$180,000 / (1+0.15)8]

= $156,521.74 + $136,105.86 + $118,352.92 + $171,525.97 + $149,153.02 + $129,698.28 + $112,781.11 + $98,070.53

= $1,072,209.44

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