A carpet manufacturer in Georgia plans to expand its plant for a capital investment of $500,000. The

Question:

A carpet manufacturer in Georgia plans to expand its plant for a capital investment of $500,000. The extra capacity will permit the company to produce 400,000 yards of carpet each year during the plant’s five-year life. Each yard of carpet will produce a revenue of $2.00, and the plant’s incremental operating expenses are expected to be $150,000 each year. Assume the expansion has no salvage value at the end of year five. If the manufacturer’s MARR is 18% per year, what is the minimum annual production rate to make the expansion a worthwhile investment?

(a) 103,400 yards

(b) 310,000 yards

(d) 250,350 yards

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... MARR
Minimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other...

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