Question
a) An investment of $2.5 million is spread evenly over two years and is followed by revenues of $750,000 in year 1, increasing 10% each
a) An investment of $2.5 million is spread evenly over two years and is followed by revenues of $750,000 in year 1, increasing 10% each year thereafter, against constant costs of $150,000 per year. What are the project balances over the life of the project, which runs for seven years after the investment is completed, assuming a 15% interest rate? Is the project risky? Why or why not? b) A $250,000 machine is purchased that can produce up to 10,000 parts per quarter over a life of six years. If each part generates a profit of $2.50 and annual fixed costs are $15,000, what is the break-even production level per quarter for the machine? Assume a 12% annual interest rate. c) Consider again Part (b), and graph the project balance over time, assuming production runs at full capacity. On the same graph, plot the project balance over time, assuming that production starts with 10,000 parts in the first year and increases by 10,000 parts each year until reaching capacity. Use the graphs to define the differences in risk between the two scenarios.
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