Before evaluating the economic merits of a proposed investment, the XYZ Corporat

Question

Before evaluating the economic merits of a proposed investment, the XYZ Corporation insists that its engineers develop a cash flow diagram of the proposal. An investment of $10,000 can be made that will produce uniform annual revenue of $5,310 for five years and then have a market (recovery) value of $2,000 at the end of year (EOY) five. Annual expenses will be $3,000 at the end of each year for operating and maintaining the project. According to this information, answer Part a and Part b a) Which one of the following is the correct net cash-flow diagram from the corporation's viewpoint for the five-year life of the project? OA. $10,000 $5,310 0 2 4 $1,000

Explanation / Answer

Solution:

Part a --- the correct option is C

Initial Investment = Cash Outflow (below the time line) = $10,000

Annual Cash Inflow (Year 1 to 5) = Annual Revenue – Annual Expense = 5310 – 3000 = $2,310

Year 5 Cash Inflow = 2,000 recovery

Hence, the correct option is C.

Part b --- Compounding Interest = 1358.55%

(1+0.11)25 = 1358.55%

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