Question

It require an investment of $1Billion in a new machine for car interior decoration.
Demand for the company’s car is expected to begin at 100,000 units in year 1, with 10% annual growth thereafter. Production cost will be $35,000 per unit in the first year, and increase by a rate of either 3% or 5% per year as a result of wage increase. Selling price will start at $37,000 and increase by 4% of the production cost. The model will be phased out at the end of year 10. In addition, 0.3%, 2% and 1.5% of before tax profit per year will be spent on social corporate responsibility, commercial (including promotions) and recalls respectively. Assume taxes will be 30% of yearly profit and that inflation will remain at 0% per year throughout the 10 year of production. Also assume interest rate is expected to be 3% per year in the first 5 years and 5% in the last 5 years. a. Based on present worth analysis, is it profitable if production cost increases by a rate of 3% per year as a result of wage increase?

Answer 1

From the table;

PPU-production per unit

TPC-Total production cost

IP-increase in production cost

SP-selling price

PBT-profit before tax

PAT-profit after tax

pvif-present value interest factor

NPV-net present value

csr-social responsibility cost

$Profit=TS-TPC$

TS total sales

TPC total production cost

$PBT=cs-pc-rc$

cs social responsibility cost

pc promotional cost

rc recalls cost

Conclusion

The project is profitable