A new plant to produce tractor gears requires an initial investment of $10 milli

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A new plant to produce tractor gears requires an initial investment of $10 million. It is expected that a supplemental investment of $4 million will be needed every 3 years to update the plant. The plant is expected to start producing gears 2 years after the initial investment is made (at the start of the third year). Revenues of $5 million per year are expected to begin to flow at the start of the fourth year. Annual operating and maintenance costs are expected to be $2 million per year. The plant has a 15-year life. List the annual cash flows. Ans. CF0 = -$10 000 000, CF1 = CF2 = 0, CF3 = -$6 000 000, CF4 = CF5 = CF7 = CF8 = CF10 = CF11, -CF13 = CF14 = $3 000 000, CF6 = CF9 = CF12, = CF15 = -$I 000 000 What is the NPV of the investment described in Problem 8.13 if the interest rate is 3% per year, compounded annually? Ans. $48 465.06

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