opportunity costs in today's $s using upexcess plant capacit

scarter

New member
Joined
Aug 29, 2008
Messages
24
Opportunity costs:
Plant has 15% excess capacity being used at 5% year. At the end of three years you will need to add on to the palnt at cost of $8000000. The expansion should take you thry 15 years of sufficient capacity. You are now considering a new product line that will use up 10% of the current plant. If you undertake this project the nedd to expand will be moved up from the end of 3 to end year 1. Cost of construction the year 1 is 700000. Use a discount rate of 10% what is the opportunity cost in today's dollars for using upexcess plant capacity? assuming product stays in production only 10 years.

I came up with:

-7,000,000(1.10)^-1 + 8,000,000 (1.10)^-3
-7,000,000 * .909 + 8,000,000 * .75131
-6,436,100 + 6,000,000

answer -436,100 for using up something that is idle

scarter I believe this is correct just want a review..
 
Re: opportunity costs

...I need a couple of Tylenols...

Sir Carter, WHAT are you studying?
You were having problems with simple fractions in another post...yet you're posting huge financial problems :shock:
 
Re: opportunity costs

Yes this is true about the tylenol.
My homework is corporate business.
But in my much younger years I didn't apply myself to math.
Today I stress to kids the importance of math.
I love it when it works. I am enjoying the challange but wonder if my solutions are correct.
that is why I am asking questions.
I think this answer is correct.

just looking for a backup to my confidence.

Scarter :)
 
Re: opportunity costs

scarter said:
Plant has 15% excess capacity being used at 5% year.
I wish I could make sense of the wording of the problems you have submitted.

If a plant has excess capacity, normally that would mean that capacity ISN'T being used.

The 5% has me lost. Is that 1/3 of the 15% excess, making 105% of capacity or 4.35% of total plan capacity? (5/115)?
 
Re: opportunity costs

Your computing for something that is idle. and include this value.
IE if my answer is correct $-436,100 this is the amount that should be charged to the new project. Cash outflow of $-436,100 for idle space.

The class notes he gave us are similiar to this problem. IE the new construction 1 year is due to a new product line.
At time period 3 years we built the plant. There fore his class notes make it the difference of the two.
-7M (1.10)^-1 + 8M (1.10)^3
If you had 15% and used 5% a year but the current product will use 10% then there is only 5% left
I hope I am saying this properly.

scarter
 
Top