II. Solve the following mini case study: Assume yourself an economic consultant
ID: 392039 • Letter: I
Question
II. Solve the following mini case study: Assume yourself an economic consultant who has been approached on October lst, 2006 by a client who has a manufacturing facility. You were told by this client that, during the year that ended on the 30th of September 2006, he obtained $150,000 in yearly revenues from selling the manufactured products, while his yearly operation and maintenance (O&M) expenses were $75,000. Based on economic prospects, estimates for the revenues are expected to continue as is for the next five years, whereas the O&M expenses will rise at a constant amount of $4000 per year. Every year on the 30th of September, this client deposits the profit (ie, revenues minus expenses) into an account that earns 13% compounded annually. You have further been told by this client that the accumulated balance in the account right now is S430,000 (including yesterday's deposit of $75,000). The client considers demolishing the existing facility five years from now (he will still make five more deposits) and replace it with a modern facility estimated to cost $1,750,000. How much more cash (if any) will need to be raised by this client in addition to what will be there in the account five years from now so as to be able to fund the new facility??Explanation / Answer
Year 0 1 2 3 4 5 Revenue 150000 150000 150000 150000 150000 Costs 79000 83000 87000 91000 95000 Profit 71000 67000 63000 59000 55000 Fund Value 430000 556900 696297 849816 1019292 1206800 Estimated Cost 1750000 Fund value 1206800 Additional cash 543200