Bottled water continues to be a hot market. The ClearWater bottling company has decided to introduce Sparkle, a new line of bottled water. ClearWater expects to manufacture 10,000 bottles of Sparkle every day, 365 days per year.
It will cost ClearWater $5,000,000 for manufacturing equipment to produce Sparkle. The variable manufacturing cost for each bottle of Sparkle will be $0.25 the first year. This price is expected to increase at a geometric rate of 8% every year, e.g. variable cost per bottle in year 2 = $0.25 * ( 1 + .08) ^ 1 = $0.27, year 3 = $0.2916 and so on. Annual, fixed costs are $1,000,000. Assume that fixed and variable manufacturing costs occur at the end of each year.
Each bottle of Sparkle results in an income of $1.00. Assume that every bottle manufactured in a year is sold in the same year.
Sparkle is expected to have a 10-year life, at which time the manufacturing equipment will have a salvage value of $650,000.
Use an MARR of 12% per year compounded annually to determine the Net Present Worth of manufacturing Sparkle. Use a 10-year study period. Include the initial cost of the equipment, annual manufacturing costs, annual income and the salvage value of the equipment.