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In a new highly automated factory, labor costs are expected to decrease at an annual rate of 5 percent; material costs will increase at an annual rate of 4 percent; overhead costs will increase at 8 percent. The labor, material, and overhead costs at the end of year 1 are $2 million,$3 million, and $1.6 million, respectively. The time value of money rate is 11 percent, and the time horizon is 7 years.

a. Determine the dollar value for each cost category (labor, material, overhead) for each year and determine the total cost for each year. (Hint: Use a spreadsheet!)

b. Determine the present worth of each cost category and the total cost.

c. Determine the annual worth over 7 years that is equivalent to the present worth of the total cost


Answered 2 years ago
Answered 2 years ago
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a.) The dollar value for each year can be solved using equation 2.40 which is At=A1(1+j)tA_t=A_1(1+j)^t where A1A_1 is the cost at year 1, jj is the percentage increase or decrease per year and tt is the number of years.

b.) The present worth can be solved by using the excel formula which is P=NPV(i%,A1:AT)P=NPV(i\%,A_1:A_T)

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