Question
Your firm is considering a project that requires an initial investment of $112,000 and will produce positive cash flows of $2,400 per year in perpetuity
Your firm is considering a project that requires an initial investment of $112,000 and will produce positive\ cash flows of $2,400 per year in perpetuity (starting in one year). In addition to these cash flows, you must\ consider the following: Assume that undertaking this project requires the use of an existing machine. If the\ project is rejected, this old machine will last 9 more years before it needs to be replaced with a new machine.\ However, if the project is accepted, the old machine will need to be replaced in 6 years with a new machine.\ This new machine has more than enough capacity to handle the new project and all other existing projects, will\ cost $45000 to purchase (either at t = 9 or t = 6) and will cost $8600 per year to operate for the next 12 years\ (until t= 21 or t = 18). At the end of this 12-year period, an identical machine with the same cash flows will be\ purchased. This will continue forever. Assume that the figures presented are real cash flows. Therefore, the\ cash flows are the same if the replacement machine is purchased at time 9 or time 6. Use a 3% real discount\ rate. As in the example discussed in class, ignore the cash flows associated with maintaining and operating the\ existing machine (6 pts).
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