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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Net cash flow and timeline depiction
Transcribed Image Text:1.
Net cash flow and timeline depiction For each of the following projects, determine the net cash flows, and depict the cash flows on a time line.
a. A project that requires an initial investment of $124,000 and will generate annual operating cash inflows of $21,000 for the next 20 years. In each of the 20 years, maintenance of the project will require a $5,400 cash outflow.
b. A new machine with an installed cost of $89,000. Sale of the old machine will yield $35,000 after taxes. Operating cash inflows generated by the replacement will exceed the operating cash inflows of the old machine by $22,000 in each year of a 6-year period. At the end of year 6, ligquidation of the new machine will yield
$22,000 after taxes, which is $12,000 greater than the after-tax proceeds expected from the old machine had it been retained and liquidated at the end of year 6.
c. An asset that requires an initial investment of $3 million and will yield annual operating cash inflows of $300,000 for each of the next 14 years. Operating cash outlays will be $19,000 for each year except year 5, when an overhaul requiring an additional cash outlay of $501,000 will be required. The asset's liquidation value at
the end of year 14 is expected to be zero.
a. A project that requires an initial investment of $124,000 and will generate annual operating cash inflows of $21,000 for the next 20 years. In each of the 20 years, maintenance of the project will require a $5,400 cash outflow. (Select all the choices that apply.)
O A. This is a conventional cash flow pattern, where the cash inflows are of equal size, which is referred to as an annuity.
O B. Year
18
19
20
Cash flow - $124,000 $15,600
$15,600
$15,600
$15,600
$15.600
$15,600
O C. At year 0, the initial investment will be - $124,000. For each of the years 1 thru 20, the net cash flow wilIl be $21,000.
O D. At year 0, the initial investment will be - $124,000. For each of the years 1 thru 20, the net cash flow will be $21,000 - $5,400 = $15,600.
b. A new machine with an installed cost of $89,000. Sale of the old machine will yield $35,000 after taxes. Operating cash inflows generated by the replacement will exceed the operating cash inflows of the old machine by $22,000 in each year of a 6-year period. At the end of year 6, ligquidation of the new machine will yield
$22,000 after taxes, which is $12,000 greater than the after-tax proceeds expected from the old machine had
been retained and liquidated at the end of year 6. (Select all the choices that apply.)
ПА. Year
1
2.
3
4
5
Cash flow - $54,000
$22,000
$22,000
$22,000
$22,000
$22,000
$22,000
Пв. Yеar
1
3
4
Cash flow - $54,000
$22,000
$22,000
$22,000
$22,000
$22,000
$34,000
O C. At year 0, the initial investment will be - $89,000 + $35,000 = - $54,000. For each of the years 1 thru 5, the net cash flow will be $22,000.
year 6, the net cash flow will be $22,000 + $22,000 – $10,000 = $34,000.
O D. This is a conventional cash flow pattern, where the subsequent cash inflows vary, which is referred to as a mixed stream.
c. An asset that requires an initial investment of $3 million and will yield annual operating cash inflows of $300,000 for each of the next 14 years. Operating cash outlays will be $19,000 for each year except year 5, when an overhaul requiring an additional cash outlay of $501,000 will be required. The asset's liquidation value at
the end of year 14 is expected to be zero. (Select all the choices that apply.)
O A. Year
4
6
13
14
Cash flow
$281,000
$281,000
- $201,000 $281,000
$281,000 $281,000
-$3 million
O B. At year 0, the initial investment will be - $3,000,000. For each of the years 1 thru 4 and
thru 14, the net cash flow will be $300,000 - $19,000 = $281,000. At year 5, the net cash flow will be $300,000 - $501,000 = - $201,000.
O c. At year 0, the initial investment will be - $3,000,000. For each of the years 1 thru 4 and 6 thru 14, the net cash flow will be $300,000. At year 5, the net cash flow will be $300,000 - $501,000 = - $201,000.
O D. This is a nonconventional cash flow pattern, with several cash flow series of equal size, which is referred to as an embedded annuity.
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