Question
A project is being considered that requires $1,000,000 for fixed-capital investment and $100,000 for working capital. The fixed capital is depreciated on a straight-line basis
A project is being considered that requires $1,000,000 for fixed-capital investment and $100,000 for working capital. The fixed capital is depreciated on a straight-line basis to a book value of zero at the end of the fifth year. The annual revenue in those 5 years is $500,000. The total product cost not including depreciation is $100,000 annually. The discount rate is 10 percent, and the income taxation rate is 35 percent. Develop a spreadsheet that shows the annual cash flow, the discounted cash flow, and the net present worth for each year. Treat the investments as occurring in a lump sum at zero time. The revenues and expenses occur continuously and utilize continuous compounding. Now assume an inflation rate of 5 percent on both the revenues and the expenses. Again, develop another spreadsheet that shows the annual cash flow, the discounted cash flow, and the net present worth for each year.
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