Question

how would you do question 8

me Value of Money 8. You are the owner of a factory located in a hot tropical climate. The monthly production of the factory is $100,000 except during June-September, when it falls to $80,000 due to the heat in the factory. In January 2017, you get an offer to install an air-conditioning system in your factory. The cost of the air-conditioning system is $150,000, and its expected life span is 10 years. If you install the air-conditioning system, the production in the summer months will equal the production in the winter months. However, the cost of ating the air-conditioning system is $9,000 per month (only in the 4 months that you operate the system). You will also need to pay a maintenance fee of $5,000 annually in October. Also assume that the depreciation costs are recognized in December of each year and that taxes are paid in December of each year. The depreciation is straight-line to salvage value zero (which is also the anticipated terminal value). oper- vчи A a. What is the December equivalent pre-tax and pre-depreciation annual profits? b. What is the NPV of purchasing the air-conditioning system if the discount rate is 12% and corporate tax rate is 35%? 9. (Cash-flow analysis) The "Cold and Sweet" 1ce ora

Answer 1

Since the monthly production is given we cannot find the total cost

1. Incremental annual profits be like :-

Production increased due to installation of air conditioner

• 20000*4 = 80000 ( 4 months incremental production )

Cost incurred due to installation of AC is as follows

• Operating cost for 4 months > 9000*4=36000

Maintenance fee > 5000

Therefore pre-depreciation incremental annual profits will be

80000-(36000+5000) = 39000