Please show your work An automobile manufacturer is converting an assembly line
ID: 1090722 • Letter: P
Question
Please show your work
An automobile manufacturer is converting an assembly line from standard vehicles to hybrid vehicle production. Conversion will cost $100 million. Production capacity will be 4000 vehicles in the first year and will increase by 1000 vehicles per year for all future years. Each hybrid earns a net profit of $5,000. a. If the interest rate is 15 how many years will it take until the present worth of the net benefits equals the $100 million initial cost? Report your answer to 2 decimal places. b. Using the simple payback method, how many years will it take the $100 million investment to pay back? Report your answer to 2 decimal places. c. Based on your answers to parts a. and b. would you recommend this investment? Why or why not?Explanation / Answer
a)
Present value of cash flows upto year 5 = 20,000,000.00/1.15 + 25,000,000.00/1.15^2 + 30,000,000.00/1.15^3 + 35,000,000.00/1.15^4 + 40,000,000.00/1.15^5=$95918816.01
Years to break even = 5 + (100000000-95918816.01)/(45,000,000.00/1.15^6)= 5.21 years
b. Payabck period = 3+ (100000000-75000000)/35000000= 3.71 years
c. yes, i would recommend investment because 100 million will be recovered in 5.21 years
0 1 2 3 4 5 6 Initial cost -100000000 No of vehicles 4000 5000 6000 7000 8000 9000 Net profit 20,000,000.00 25,000,000.00 30,000,000.00 35,000,000.00 40,000,000.00 45,000,000.00