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Home Q & A Board Science-Related Homework Help Mathematics
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majarm majarm
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6 years ago
LD Winery expects a demand of 10 000 bottles per year for a special purpose wine for six years. Net return per unit is $6.10. To produce the wine, LD must buy equipment costing $200 000 with a life of six years and a salvage value of $10 000 after six years. The company estimates that repair costs will be $8000 per year during Years 2 to 6. Should LD invest in the equipment if it requires a return of 16% on its investment?
Textbook 
Contemporary Business Mathematics with Canadian Applications

Contemporary Business Mathematics with Canadian Applications


Edition: 11th
Authors:
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#1
6 years ago
Inflows: PMT = $10 000(6.10) = $61 000; P/Y = C/Y = 1; I/Y = 16%; n = 6
PVIN = 61000  = 224 769
PVOUT = 200 000 + 8 000   - 10 000 ( )
   = 200 000 + 26 194.3492 - 4104.4225
   = 222 089.9267 = $222 090
NPV = 224 769 - 222 090 = $2679
Since NPV > 0, the return on the investment is greater than 16%. LD Winery should invest in the equipment.
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