Based on past experience, a chemicals firm estimates that the cost of new capacity additions obeys the lawf(y) =.0205y58where y is measured in tons per year and f(y) in millions of dollars. Demand isgrowing at the rate of 3,000 tons per year, and the accounting department recommends a rate of 12 percent per year for discounting future costs.a. Determine the optimal timing of plant additions and the optimal size of eachaddition.b. What is the cost of each addition?c. What is the present value of the cost of the next four additions? Assume anaddition has just been made for the purposes of your calculation. (Refer toAppendix 1–A for a discussion of cost discounting.)

Based on past experience, a chemicals firm estimates that the cost of new capacity additions obeys the lawf(y) =.0205y58where y is measured in tons per year and f(y) in millions of dollars. Demand isgrowing at the rate of 3,000 tons per year, and the accounting department recommends a rate of 12 percent per year for discounting future costs.a. Determine the optimal timing of plant additions and the optimal size of eachaddition.b. What is the cost of each addition?c. What is the present value of the cost of the next four additions? Assume anaddition has just been made for the purposes of your calculation. (Refer toAppendix 1–A for a discussion of cost discounting.)

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter17: Long-term Investment Analysis

Section: Chapter Questions

Problem 3E

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