Decker Scientific is considering an investment of $850,000 in a new product line. The company will make the investment only if it will result in a rate of return of 20% per year or higher. If the revenue is expected to be between $290,000 and $325,000 per year for each of 5 years, determine if the decision to invest is sensitive to the projected range of income using an annual worth analysis.
What will be an ideal response?
$290,000: AW = -850,000(A/P,20%,5) + 290,000
= -850,000(0.33438) + 290,000
= $5777 (ROR > 20%)
$325,000: AW = -850,000(A/P,20%,5) + 325,000
= -850,000(0.33438) + 325,000
= $40,777 (ROR > 20%)
The decision to invest is not sensitive to the revenue estimate range.
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