Lifewear, a manufacturer of women's sports clothes, is considering adding a line of skirts and jackets. The production would take place in a part of its factory that is currently not being used. The first output would be available in time for the 2021 fall season. The following information is available. Answer parts (a) through (d). percent. a. What is the real internal rate of return? (This is most easily done with a spreadsheet.) The real internal rate of return is about (Round to one decimal place as needed.) b. What inflation rate will make the real MARR equal to the real internal rate of return? First cost in 2020 (S) Planned output (units/year) Observed, current dollar MARR before tax Study period Year 2020 Prices ($/unit) Materials Labour Output percent. New Product Line Information 15,000,000 323,000 0.25 6 years 11 7.25 33 The inflation rate would need to be about (Round to two decimal places as needed.) c. Calculate the present worth of the project under three possible future inflation rates. Assume the inflation rate will be 1 percent, 2 percent, or 3 percent per year. With an inflation rate of 1 percent, the present worth of the project would be $. With an inflation rate of 2 percent, the present worth of the project would be S worth of the project would be $ (Round to the nearest integer as needed.) With an inflation rate of 3 percent, the present
Lifewear, a manufacturer of women's sports clothes, is considering adding a line of skirts and jackets. The production would take place in a part of its factory that is currently not being used. The first output would be available in time for the 2021 fall season. The following information is available. Answer parts (a) through (d). percent. a. What is the real internal rate of return? (This is most easily done with a spreadsheet.) The real internal rate of return is about (Round to one decimal place as needed.) b. What inflation rate will make the real MARR equal to the real internal rate of return? First cost in 2020 (S) Planned output (units/year) Observed, current dollar MARR before tax Study period Year 2020 Prices ($/unit) Materials Labour Output percent. New Product Line Information 15,000,000 323,000 0.25 6 years 11 7.25 33 The inflation rate would need to be about (Round to two decimal places as needed.) c. Calculate the present worth of the project under three possible future inflation rates. Assume the inflation rate will be 1 percent, 2 percent, or 3 percent per year. With an inflation rate of 1 percent, the present worth of the project would be $. With an inflation rate of 2 percent, the present worth of the project would be S worth of the project would be $ (Round to the nearest integer as needed.) With an inflation rate of 3 percent, the present
Chapter1: Making Economics Decisions
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Transcribed Image Text:Lifewear, a manufacturer of women's sports clothes, is considering adding a line of skirts and jackets. The production would take place in a part of its factory that is currently not being used. The first output would
be available in time for the 2021 fall season. The following information is available. Answer parts (a) through (d).
First cost in 2020 ($)
Planned output (units/year)
Observed, current dollar MARR before tax
Study period
Year 2020 Prices ($/unit)
Materials
Labour
Output
New Product Line Information
a. What is the real internal rate of return? (This is most easily done with a spreadsheet.)
percent.
The real internal rate of return is about
(Round to one decimal place as needed.)
b. What inflation rate will make the real MARR equal to the real internal rate of return?
percent.
15,000,000
323.000
0.25
6 years
accept the project since the project
11
7.25
33
The inflation rate would need to be about
(Round to two decimal places as needed.)
c. Calculate the present worth of the project under three possible future inflation rates. Assume the inflation rate will be 1 percent, 2 percent, or 3 percent per year.
With an inflation rate of 1 percent, the present worth of the project would be $. With an inflation rate of 2 percent, the present worth of the project would be $. With an inflation rate of 3 percent, the present
worth of the project would be $.
(Round to the nearest integer as needed.)
d. Decide if Lifewear should add this new line of skirts and jackets. Explain your answer.
Based on the answers from parts (a), (b), and (c), the firm
▼profitable at inflation rates below the inflation rate found in part (b) where said inflation rates are
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