Question
You are thinking of making an investment in a new factory. The factory will generate revenues of $ 1 comma 740 comma 000$1,740,000 per year
You are thinking of making an investment in a new factory. The factory will generate revenues of
$ 1 comma 740 comma 000$1,740,000
per year for as long as you maintain it. You expect that the maintenance costs will start at
$ 90 comma 480$90,480
per year and will increase
5 %5%
per year thereafter. Assume that all revenue and maintenance costs occur at the end of the year. You intend to run the factory as long as it continues to make a positive cash flow (as long as the cash generated by the plant exceeds the maintenance costs). The factory can be built and become operational immediately and the interest rate is
6 %6%
per year.
a. What is the present value of the maintenance costs?
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