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). New Product Line Information First cost in 2020 ($) 15,100,000 Planned output (units/year) 324,000 Observed, current dollar MARR before tax Study period Materials 0.25 6 years Year 2020 Prices ($/unit) Labour 12 8.25 35 Output 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 percent. (Round to one decimal place as needed.) b. What inflation rate will make the real MARR equal to the real internal rate of return? The inflation rate would need to be about percent. (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 2 percent, the present worth of the project would be $ With an inflation rate of 1 percent, the present worth of the project would be $ present worth of the project would be $ (Round to the nearest integer as needed.) . With an inflation rate of 3 percent, the 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 accept the project since the project profitable at inflation rates below the inflation rate found in part (b) where said inflation rates are
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). New Product Line Information First cost in 2020 ($) 15,100,000 Planned output (units/year) 324,000 Observed, current dollar MARR before tax Study period Materials 0.25 6 years Year 2020 Prices ($/unit) Labour 12 8.25 35 Output 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 percent. (Round to one decimal place as needed.) b. What inflation rate will make the real MARR equal to the real internal rate of return? The inflation rate would need to be about percent. (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 2 percent, the present worth of the project would be $ With an inflation rate of 1 percent, the present worth of the project would be $ present worth of the project would be $ (Round to the nearest integer as needed.) . With an inflation rate of 3 percent, the 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 accept the project since the project profitable at inflation rates below the inflation rate found in part (b) where said inflation rates are
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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).
New Product Line Information
First cost in 2020 ($)
15,100,000
Planned output (units/year)
324,000
Observed, current dollar MARR before tax
Study period
Materials
0.25
6 years
Year 2020 Prices ($/unit)
Labour
12
8.25
35
Output
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
percent.
(Round to one decimal place as needed.)
b. What inflation rate will make the real MARR equal to the real internal rate of return?
The inflation rate would need to be about percent.
(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 2 percent, the present worth of the project would be $
With an inflation rate of 1 percent, the present worth of the project would be $
present worth of the project would be $
(Round to the nearest integer as needed.)
. With an inflation rate of 3 percent, the
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
accept the project since the project
profitable at inflation rates below the inflation rate found in part (b) where said inflation rates
are
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