Question

Economics Question 1 ABC

A product in the first year is expected to have a positive cash flow of $60,000, then grow at the rate of $12,000 per year. The life of the product is 15 years. If the companies Minimum acceptable rate of return is 15%. What can be spent on renovations for producing this product?

Answer 1

The positive cash flow in the first year is $60,000.

Base amount (A) = $60,000

Per year increase in cash flow (G) = $12,000

Time = 15 years

MARR = 15%

Calculate the persent worth of the cash flows -

PW = A(P/A, i, n) + G(P/G, i, n)

PW = $60,000(P/A, 15%, 15) + $12,000(P/G, 15%, 15)

PW = ($60,000 * 5.8474) + ($12,000 * 26.6930)

PW = $350,844 + $320,316 = $671,160

The present worth of cash flows is $671,160.

Thus,

The firm can spent $671,160 on renovations for producing this product.