10. You are also considering another project with a physical life of 3 years; that is, themachinery will be worn out after 3 years. However, if the project were terminated before theend of 3 years, the machinery would have a positive salvage value. Here are the project’sestimated cash flows: Yr CF Salvage0 ($850,000) $850,0001 375,000 675,0002 425,000 325,0003 384,000 0 Using the 12% cost of capital, what is the project’s NPV if it is operated for the full 3years? Would the NPV change if the company planned to terminate the project at theend of Year 2? At the end of Year 1? What is the project’s optimal (economic) life?
10. You are also considering another project with a physical life of 3 years; that is, themachinery will be worn out after 3 years. However, if the project were terminated before theend of 3 years, the machinery would have a positive salvage value. Here are the project’sestimated cash flows: Yr CF Salvage0 ($850,000) $850,0001 375,000 675,0002 425,000 325,0003 384,000 0 Using the 12% cost of capital, what is the project’s NPV if it is operated for the full 3years? Would the NPV change if the company planned to terminate the project at theend of Year 2? At the end of Year 1? What is the project’s optimal (economic) life?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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10. You are also considering another project with a physical life of 3 years; that is, the
machinery will be worn out after 3 years. However, if the project were terminated before the
end of 3 years, the machinery would have a positive salvage value. Here are the project’s
estimated cash flows:
Yr CF Salvage
0 ($850,000) $850,00
0
1 375,000 675,000
2 425,000 325,000
3 384,000 0
Using the 12% cost of capital, what is the project’s NPV if it is operated for the full 3
years? Would the NPV change if the company planned to terminate the project at the
end of Year 2? At the end of Year 1? What is the project’s optimal (economic) life?
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