Net cash flow and timeline depiction For each of the following projects, determine the net cash flows, and depict the cash flows on a time line. a. A project that requires an initial investment of $120,000 and will generate annual operating cash inflows of $25,000 for the next 18 years. In each of the 18 years, maintenance of the project will require a $5,000 cash outflow. b. A new machine with an installed cost of $85,000. Sale of the old machine will yield $30,000 after taxes. Operating cash inflows generated by the replacement will exceed the operating cash inflows of the old machine by $20,000 in each year of a 6-year period. At the end of year 6, liquidation of the new machine will yield $20,000 after taxes, which is $10,000 greater than the after-tax proceeds expected from the old machine had it been retained and liquidated at the end of year 6. c. An asset that requires an initial investment of $2 million and will yield annual operating cash inflows of $300,000 for each of the next 10 years. Operating cash outlays will be $20,000 for each year except year 6, when an overhaul requiring an additional cash outlay of $500,000 will be required. The asset's liquidation value at the end of year 10 is expected to be zero. a. A project that requires an initial investment of $120,000 and will generate annual operating cash inflows of $25,000 for the next 18 years. In each of the 18 years, maintenance of the project will require a $5,000 cash outflow. (Select all the choices that apply.) A. This is a conventional cash flow pattern, where the cash inflows are of equal size, which is referred to as an annuity. OB. At year 0, the initial investment will be - $120,000. For each of the years 1 thru 18, the net cash flow will be $25,000 OC. At year 0, the initial investment will be - $120,000. For each of the years 1 thru 18, the net cash flow will be $25,000 - $5,000 = $20,000. D. Year 0 1 2 16 17 18 - -- Cash flow - $120,000 $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 b. A new machine with an installed cost of $85,000. Sale of the old machine will yield $30,000 after taxes. Operating cash inflows generated by the replacement will exceed the operating cash inflows of the old machine by $20,000 in each year of a 6-year period. At the end of year 6, liquidation of the new machine will yield $20,000 after taxes, which is $10,000 greater than the after-tax proceeds expected from the old machine had it been retained and liquidated at the end of year 6. (Select all the choices that apply.) A. At year 0, the initial investment will be - $85,000 + $30,000 = - $55,000. For each of the years 1 thru 5, the net cash flow will be $20,000. At year 6, the net cash flow will be $20,000 + $20,000 - $10,000 = $30,000. OB. Year 1 2 3 4 5 6 $20,000 $20,000 $20,000 $20,000 Cash flow - $55,000 OC. Year 0 $20,000 1 $20,000 2 5 6 Cash flow - $55,000 $20,000 $20,000 $20,000 $20,000 $20,000 $30,000 OD. This is a conventional cash flow pattern, where the subsequent cash inflows vary, which is referred to as a mixed stream. c. An asset that requires an initial investment of $2 million and will yield annual operating cash inflows of $300,000 for each of the next 10 years. Operating cash outlays will be $20,000 for each year except year 6, when an overhaul requiring an additional cash outlay of $500,000 will be required. The asset's liquidation value at the end of year 10 is expected to be zero. (Select all the choices that apply.) A. This is a nonconventional cash flow pattern, with several cash flow series of equal size, which is referred to as an embedded annuity B. Year 1 6 7 10 Cash flow $280,000 $280,000 - $200,000 $280,000 $280,000 $280,000 - $2 million OC. At year 0, the initial investment will be - $2,000,000. For each of the years 1 thru 5 and 7 thru 10, the net cash flow will be $300,000. At year 6, the net cash flow will be $300,000 - $500,000 = - $200,000 OD. At year 0, the initial investment will be - $2,000,000. For each of the years 1 thru 5 and 7 thru 10, the net cash flow will be $300,000 - $20,000 = $280,000. At year 6, the net cash flow will be $300,000 - $500,000 = - $200,000
