A firm has installed a manufacturing line for packing materials. the firm plans to produce 50 tons of packing peanuts at $5000 per ton annually for 5 years, and then 80 tons of packing peanuts per year at $5500 per ton for next 5 years. what is the present worth of the expected income? the firm's minimum attractive rate of return is 18% per year.

QUESTION POSTED AT 29/05/2020 - 02:19 PM

Answered by admin AT 29/05/2020 - 02:19 PM

A1=50*5000=250000 for annually first 5 years
A2=80*5500=440000 for annually 6th to 10th year
MARR=18%

Present value of first 5 years of production
I1=A1*[P/A,0.18,5]
=250000((1.18^5-1)/(.18*1.18^5)
=$781792.755

Value of production 6th to 10th year, reduced to present (t=0)
I2=A2*[P/A,0.18,5]/(1.18^5)
=1375955.249/2.287757757
=$601442.721

Present worth of expected income
=I1+I2
=781792.755+601442.721
=$1,383,235.48
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