Question

4. A manufacturing company's operating expense is $12,000/year starting EOY 1 and continuing for 9 additional years. Revenue is projected to be $10,000/year starting EOY 1 and continuing for 4 additional years. After that, revenue is expected to increase to $15,000/year and remain constant for the next 4 years. Then nominal rate of interest for all years is 10%.

a: Draw a cash flow diagram from the company's perspective.

b: Based on the present work of these cash flows (equivalent of these cash flows at time =0), was the company profitable?

Answer 1

Sol:-

I hope it will helps you.kindly rate it.

Annual costs are $12000 for all years. Annual revenues are $10000 for 1-4 years and $15000 for 5-9 years. This implies that the net cash flows are -$2000 for 1-4 years and $3000 for 5-9 years. The cash flow is shown below.

Present value of the cash flow = -2000(P/A, 10%, 4) + 3000((P/A, 10%, 9) - (P/A, 10%, 4))

= -2000*3.1699 + 3000*(5.7590 - 3.1699)

= 1427.50

Since net cash flow is positive, the project is profitable.

Thanks.