Home Automation is considering an investment of $500,000 in a new product line. The company will make the investment only if it will result in a rate of return of 15% per year or higher. The revenue is expected to be between $138,000 and $165,000 per year for 5 years. (a) Determine if the decision to invest is sensitive to the projected range of income using a PW analysis. (b) Use a spreadsheet to determine the annual revenue required to realize 15% per year.
What will be an ideal response?
(a) PW138,000 = -500,000 + 138,000(P/A,15%,5)
= -500,000 + 138,000(3.3522)
= $-37,396 (ROR < 15%)
PW165,000 = -500,000 + 165,000(P/A,15%,5)
= -500,000 + 165,000(3.3522)
= $53,113 (ROR > 15%)
The decision to invest is sensitive to the revenue estimates
(b) Function = PMT(15%,5,-500000) displays $149,158 per year
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