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Wand Co. is considering investing in a five?year project. Initial investment of $125,000 is payable today. The scrap value of the machine will be $ 25,000 receivable at end of the project. The company received the same amount of cash inflow from year 1 to year 5. The cost of capital of the company is 12%.
What is the minimum cash inflow the company should receive in the 5 years for the company to be indifferent in deciding the project
(To the nearest $’000)?
Please do not simply type out full questions and expect to be provided with a full answer.
To be indifferent the NPV of the project will be zero and therefore the PV of the future flows must be 125,000.
You can calculated the PV of the scrap proceeds, and so the remainder of the PV will be the PV of the annual cash flow.
Since the PV of the annual cash flow will be the cash flow multiplied by the 5 years annuity factor, you can calculate the annual cash flow by dividing the PV by the 5 year annuity factor.
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