Demand for Blow Pops has increased to the point where Tootsie Roll industries is considering buying a new plant solely devoted to Blow Pops. Tootsie receives a wholesale price of $0.45 for each Blow Pop delivered to its distributor. The average cost of manufacturing a Blow Pop is $0.10. The plant and equipment will be purchased on Dec 16, 2012 for a cost of $170,000 and is expected to have a useful life of 15 years. Assume all revenues and expenses occur on 16 Dec of each year. If the plant is purchased, then the first year’s revenue will occur on Dec 16, 2013. What annual production quality makes the present value of the operating profits equal to the initial outlay on the plant and equipment? (Assume that the quantity produced is the same each year.) The firm discounts cash flow of 11% each year. Ignore taxes.
What annual production quality makes the present value of the operating profits equal to the initial outlay on the plant and equipment?