An 1C (integrated-circuit) fabrication company is considering to build a new production plant to expand their business.
For investment estimation, land costs $300,000, building costs $500,000, and the equipment costs $250,000.
It is expected that the new production plant will yield an annual revenue of $700,000 over its 12 years of useful life and after that, land can be sold for $300,000, building for $300,000, and equipment for $50,000.
The annual out-of-pocket expenses for labor, materials, and all other relevant items are estimated to be $475,000 in total.
The company requires a minimum return rate of 13% on any projects of comparable risk.
(a) Draw a cash flow diagram to show all the detailed cash flow activities of the new production plant.
(b) Use present-worth (PW) method to evaluate if the new production plant should be built.
(c) Repeat the calculation in part
(d) above by using annual-worth (AW) method. Does the decision change?