## Related questions with answers

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

Solution

Verifieda.) The dollar value for each year can be solved using equation 2.40 which is $A_t=A_1(1+j)^t$ where $A_1$ is the cost at year 1, $j$ is the percentage increase or decrease per year and $t$ is the number of years.

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

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