Question

A company has decided to invest in a project to make a product. The initial investment cost will be $1,000,000 to be spread over the first two years with $700,000 in the first year and $300,000 in the second. The plan calls for producing products at the following rates: 5,000 units in year 2; 10,000 units in year 3; 30,000 units in year 4; 30,000 units in year 5. Thereafter, the revenues are: $10,000 in year 6; and $5,000 in year 7. Products will be sold for $50 each throughout the life of the project and cash operating expenses will be $60,000 per year for years 2 through 7. Construct a cash flow diagram for the project.

Answer 1