Forecasting and Investment

The general manager of Radex Electric Co. is going to invest in new equipment that will cost $45000 and has a useful life of three years. The production function is as follows:

= 6300 1/2 1/2, where K denotes the number of machines and L denotes the number of workers.

According to the agreement with the labour union the yearly wage of a worker is 20000$ in 2020, and the growth rate of the yearly wage will be 6% in the next two years. The rental fee of the warehouse, the factory and the office is $50000/year. The rental fee remains unchanged for the next three years. The cost of the component is 4 USD/piece and each finished product requires 1 piece of component. The unit price of the component remains unchanged for the next three years. The sales data for previous years:

Year

Sales (pcs)

2014 17200

2015 17600

2016 18300

2017 18600

2018 18700

2019 18900

The Radex's Sales and Marketing Manager used a two-year moving average and a two-year weighted moving average method to forecast sales for 2020. For the latter he used 10% and 90% weights, using the greater weights in earlier observations. He made the revenue plan based on the more accurate forecast. The exclusive distributor of the product has confirmed that in 2021 they will be ordering the quantities corresponding to their 2020 sales. Moreover, their order for 2022 is expected to be 5% higher than for 2021. The distributor will buy the product for 18 USD/piece in 2020 and 2021. By 2022, a 6% price increase was accepted. The interest rate is 5%.If the production is greater than what is covered by the order it can be considered a loss of production.

What will be the predicted sales of 2020? (5 points)

How many products will be produced in the next three years and how many workers will be required? (6 points)

What is the net present value of the project (buying the new machine)? (8 points)

Is it worth investing in the new machine? (1 points)