A company is considering a project which requires $2 million capital investment.
ID: 1132261 • Letter: A
Question
A company is considering a project which requires $2 million capital investment. The project can bring in an annual revenue of $170k for the next 25 years. The annual operation cost (e.g. labor and supplies) is $10k. Starting from year 20, the equipment will need major maintenance and this cost starts at $5k and increase by 5k each year until the end of the project life time (25 years) The equipment has a salvage value of $100k at the end of the project. Calculate the project's net future value at year 25 to find out whether it's worth investing. The interest rate is 6%. Please only fill in the number of your calculated result in the blank, e.g., if the result is $100k, fill in "100"; also round to the nearest integer.Explanation / Answer
We have initial capital layout is $2 mn
life of project is 25 years
Annual operation cost=$10k
after 19 years we have maintainance cost is $5k,$10k,$15k,$20k,$25k and $30k
Salvage Value=$100k
We are going to check whether present value of future worth is greater than intial capital investment to have feasibility
Present worth of cashflow at period t from now with interest rate'r' can be calculated as =CFt/(1+r)^t
We can check it with Net Future Value approach
$2000*1.06^25=$8583.74k...Future Value of investment
170(1.06^25-1)/0.06=$9326.96k...Future value of Revenue
Future Value of Annual Cost=992.02=10(1.06^25)+...10(1.06)^6+15(1.06)^5+....+40
Salvage Value=$100
Net Future Value=$9326.96k-$992.02k-$8583.73k+$100=-$148.79k
NFV<0 hence project isnt feasible
ANswer is -148.79=-149
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