You are evaluating the profitability of a process and have the following informa
ID: 1129622 • Letter: Y
Question
You are evaluating the profitability of a process and have the following information. The criterion for profitability is a 15% rate of return over ten operating years. The equipment has zero salvage value at the end of the project. Fixed capital investment (including land) in four installments (all values are in mil- lions of dollars as one transaction at the end of the year)
Year 0 land: $10
Year 1 FCI installment1 : $20
Year 2 FCI installment 2 : $30
Year 3 FCI installment 3 : $20
Start-up capital at end of year 3 : $10
Positive cash flow years 4-13: $25
1. draw a discrete, discounted cash flow diagram for this process
2. draw a cumulative, discounted cash flow diagram for this process
3. what is the present value (at the end of year 0) for this process
4. what is the future value at the end of year 13
Explanation / Answer
a. The discrete and discounted cash flow diagram for this process is as
Year 0 land : 10
Year 1 FCI Installment : $20
Year 2 FCI Installment : $30
Year 3 FCI Installment : $20
Year 4 FCI Installment : $25
Year 5 FCI Installment : $25
Year 6 FCI Installment : $25
Year 7 FCI Installment : $25
Year 8 FCI Installment : $25
Year 9 FCI Installment : $25
Year 10 FCI Installment : $25
Year 11 FCI Installment : $25
Year 12 FCI Installment : $25
Year 13 FCI Installment : $25
b. Cummulative, discounted cash flow diagram is as:
Year Present Value Cumulative Value
0 0 -
1 20 20
2 30 50
3 20 70
4 25 95
5 25 120
6 25 145
7 25 170
8 25 195
9 25 220
10 25 245
11 25 270
12 25 295
13 25 320
c. The present value at the end of 0 year is Nil
d. Future value at the end of year 13 is $320.
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