Chapter 25: Investment Appraisal

Parts (a) and (b). A new project will cost $80,000 and is expected to last 4 years. At the end of 4 years it is expected to have a scrap value of $10,000. The project is expected to generate operating cash flows at the ends of the years as follows:

Discount factors: at 10% - year 1 0.909, year 2 0.826, year 3 0.751, year 4 0.683. At 15% - year 1 0.870, year 2 0.756, year 3 0.658, year 4 0.572.

Part (c) - a different project. It will cost $100,000 and will last for 5 years with no scrap value. Operating cash flows are: year 1 $20,000, year 2 $30,000, year 3 $40,000, year 4 $50,000, year 5 $30,000. The cost of capital is 10%; the year 5 discount factor at 10% is 0.621.

Assume that all operating cash flows occur at the ends of years and that the initial cost is paid immediately (time 0, discount factor 1.000).