Question
Question 1 A project, that consists of just readjusting some parts to adapt them to assemble to electric cars, would produce net revenues of $180,000
Question 1
A project, that consists of just readjusting some parts to adapt them to assemble to electric cars, would produce net revenues of $180,000 per year, for 10 years. Assuming that these revenues will grow at a constant 2% per year, and are assessed at a cost of capital of 4%:
- Would it still be profitable if it required an initial investment of $1,500,000?
- If we take these annual revenues of $180,000 growing at a 2% per year, and we invest them in a bank account that offers an annual rate of 5% for 10 years, how much will we have at the end?
a ) Present Value (PV) of Cash Flow
(Cash Flow)/((1+i)^N)
i=discount rate=Cost of Capital=4%=0.04
N= Year of Cash Flow
N )Year 1 2 3 4 5 6 7 8 9 10
CF Cash Inflow $180,000 $183,600 $187,272 $191,017 $194,838 $198,735 $202,709 $206,763 $210,899 $215,117 SUM
PV=CF/(1.04^N) Present Value of Cash Inflow $173,077 $169,749 $166,484 $163,283 $160,142 $157,063 $154,042 $151,080 $148,175 $145,325 $1,588,419
Present Value of Total Cash inflow $1,588,419
Initial Investment $1,500,000
Yes, it will be profitable
Present Value of Cash Inflow is more than initial investment
b) Future Value(FV) of Cash Flow at End of Year N
(Cash Flow)*((1+i)^(N-t))
i=annual interest=5%=0.05
N=Future Period=10
t=Year of Cash Flow
t) Year 1 2 3 4 5 6 7 8 9 10
CF Cash inflow $180,000 $183,600 $187,272 $191,017 $194,838 $198,735 $202,709 $206,763 $210,899 $215,117 SUM
FV=CF*(1.05^(10-t)) Future Value of Cash Flow $279,239 $271,261 $263,511 $255,982 $248,668 $241,563 $234,661 $227,957 $221,444 $215,117 $2,459,401
Amount available at the end $2,459,401
Question 2
After these previous calculations, the project still requires a big initial investment, and other options are being considered. We were considering adapting our production line, in order to produce some parts for electric automobiles, this way, and after analyzing the possible market opportunities, we could expect to obtain net revenues of $35,000 per quarter for at least the next 10 years.
Second question needs to be answered
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