It is necessary to evaluate the profitability of proposed improvements to a process prior to obtaining approval to implement changes. For one such process, the capital investment (end of year 0) for the project is $250,000. There is no salvage value. In years 1 and 2, you expect to generate an after-tax revenue from the project of $60,000/y. In years 3-8, you expect to generate an after-tax revenue of $50,000/y. Assume that the investments and cash flows are single ransactions occurring at the end of the year. Assume an effective annual interest rate of 9%. a. Draw a discrete cash flow diagram for this project. b. Draw a cumulative, discounted (to year 0) cash flow diagram for this project. c. What is the future value of this project at the end of year 8? d. Instead of investing in this project, the $250,000 could remain in the company's portfolio. What rate of return on the portfolio is needed to equal the future value of this project at the end of year 8? Would you invest in the proiect, or leave the money in the portfolio?
It is necessary to evaluate the profitability of proposed improvements to a process prior to obtaining approval to implement changes. For one such process, the capital investment (end of year 0) for the project is $250,000. There is no salvage value. In years 1 and 2, you expect to generate an after-tax revenue from the project of $60,000/y. In years 3-8, you expect to generate an after-tax revenue of $50,000/y. Assume that the investments and cash flows are single ransactions occurring at the end of the year. Assume an effective annual interest rate of 9%. a. Draw a discrete cash flow diagram for this project. b. Draw a cumulative, discounted (to year 0) cash flow diagram for this project. c. What is the future value of this project at the end of year 8? d. Instead of investing in this project, the $250,000 could remain in the company's portfolio. What rate of return on the portfolio is needed to equal the future value of this project at the end of year 8? Would you invest in the proiect, or leave the money in the portfolio?
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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Transcribed Image Text:. It is necessary to evaluate the profitability of proposed improvements to a process prior to
obtaining approval to implement changes. For one such process, the capital investment (end of
year 0) for the project is $250,000. There is no salvage value. In years 1 and 2, you expect to
generate an after-tax revenue from the project of $60,000/y. In years 3-8, you expect to generate
an after-tax revenue of $50,000/y. Assume that the investments and cash flows are single
transactions occurring at the end of the year. Assume an effective annual interest rate of 9%.
a. Draw a discrete cash flow diagram for this project.
b. Draw a cumulative, discounted (to year 0) cash flow diagram for this project.
c. What is the future value of this project at the end of year 8?
d. Instead of investing in this project, the $250,000 could remain in the company's portfolio.
What rate of return on the portfolio is needed to equal the future value of this project at the end
of year 8? Would you invest in the project, or leave the money in the portfolio?
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