The Engineers in a certain company are considering introducing a new product line. The initial investment required for this project is 250,000 OMR and the annual maintenance costs are expected to be 14,500 OMR. Annual operating costs will be directly proportional to the level of production at 11 OMR per unit, and each unit of product can be sold for 45 OMR. The estimated production output is 3000 unit per year. The MARR is 12% per year and the project has a life of 6 years. The initial investment, maintenance costs and production output are estimated to be within ±30%. Is this project acceptable from profitability point of view (show your analysis)? Analyze the sensitivity of AW to changes in each estimate individually (i.e.: make a spider plot). Based on your results rank these input factors from the highest sensitivity to the lowest. Calculate the breakeven deviations for the estimates and make recommendation either to accept or reject this project.
The Engineers in a certain company are considering introducing a new product line. The initial investment required for this project is 250,000 OMR and the annual maintenance costs are expected to be 14,500 OMR. Annual operating costs will be directly proportional to the level of production at 11 OMR per unit, and each unit of product can be sold for 45 OMR. The estimated production output is 3000 unit per year. The MARR is 12% per year and the project has a life of 6 years. The initial investment, maintenance costs and production output are estimated to be within ±30%. Is this project acceptable from profitability point of view (show your analysis)? Analyze the sensitivity of AW to changes in each estimate individually (i.e.: make a spider plot). Based on your results rank these input factors from the highest sensitivity to the lowest. Calculate the breakeven deviations for the estimates and make recommendation either to accept or reject this project.
Chapter14: Capital Structure Management In Practice
Section14.A: Breakeven Analysis
Problem 8P
Related questions
Question
The Engineers in a certain company are considering introducing a new product line. The initial investment required for this project is 250,000 OMR and the annual maintenance costs are expected to be 14,500 OMR. Annual operating costs will be directly proportional to the level of production at 11 OMR per unit, and each unit of product can be sold for 45 OMR. The estimated production output is 3000 unit per year. The MARR is 12% per year and the project has a life of 6 years. The initial investment, maintenance costs and production output are estimated to be within ±30%.
- Is this project acceptable from profitability point of view (show your analysis)?
- Analyze the sensitivity of AW to changes in each estimate individually (i.e.: make a spider plot). Based on your results rank these input factors from the highest sensitivity to the lowest.
- Calculate the breakeven deviations for the estimates and make recommendation either to accept or reject this project.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 5 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College