6. Beach Control Systems will invest $90,000 in a temporary project tat will gen

Question

6. Beach Control Systems will invest $90,000 in a temporary project tat will generate the following cash inflows for the next three years.

Year                                 Cash Flow

1                                         $23,000

2                                          38,000

3                                          60,000

The firm will be required to spend $15,000 to close down the project at the end of three years. If the cost of capital is 10%, should the investment be undertaken? Use the present value method.

Explanation / Answer

PVof cash flows = 23000/1.1+(38000/1.1^2)+(60000/1.1^3)-(15000/1.1^3)= $86123.22

Investment = 90,000

Since the PV is less than inital investment, theinvestment should not be undertaken

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