Calculate the present value of revenues-maintenance costs

Assignment Help Financial Management

Reference no: EM131014083

Erin is considering investing in a new plant that is expected to bring in $1,000,000 in revenues per annum provided that it is adequately maintained. According to hired consultants, maintenance costs will start at $50,000 in the first year but are expected to rise at 5% for each subsequent year. All revenues and maintenance costs will occur at the end of the period (year). Erin's plan is to run the plant as long as annual revenues exceed maintenance costs (positive cash flow). Assume an annual interest rate of 6% per year and that the plant is operational right away.

a. Calculate the present value of revenues and the present value of maintenance costs. (Hint: you first need to find the last year of production that is the year (N) following the first year when revenues exceed maintenance costs.

b. Suppose the initial capital cost to build the plant is $12 million. Would you advise Erin to invest in the project?

Reference no: EM131014083

Questions Cloud

Rate is consistent with the market rates : Suppose you buy a 20-year bond with face value of $1000 which pays annual coupons with a coupon rate of R=5% . Let's say that that rate is consistent with the market rates, so you pay $1000 ('par'). After 5 years, right after the 5th coupon has been ..

Calculate the present value of a delayed perpetuity : What is the present value of a $9,800 ordinary perpetuity is the applicable discount rate is 7%? Calculate the present value of a delayed perpetuity of $890 that starts with the first cash flow at the end of year 7 if the applicable discount rate is ..

What is the present value of all three perpetuities together : You will receive a $100 annual perpetuity, the first payment to be received now, at Year 0, a $300 annual perpetuity payable starting at the end of Year 5, and a $200 semiannual (2 payments per year) perpetuity payable starting midway through year 10..

The hottaco contest : You are the winner of "The HotTaco Contest" , and are given the following choices as compensation. If the interest rate is 12%, which one of the following would you take. $100,000 now, $180,000 at the end of 5 years, $19,000 for each of the next 10 y..

Calculate the present value of revenues-maintenance costs : Erin is considering investing in a new plant that is expected to bring in $1,000,000 in revenues per annum provided that it is adequately maintained. Calculate the present value of revenues and the present value of maintenance costs. (Hint: you first..

Domestic corporation-manufactures and sells widgets : USAco, a domestic corporation, manufactures and sells widgets in the U.S. and worldwide through its two wholly-owned foreign subsidiaries. USAco’s Hong Kong subsidiary, HKco, earns $100,000 of foreign-source income from sales in Hong Kong and pays $2..

Identify one of the tax credits mentioned-current treatment : Identify one of the tax credits mentioned and discuss its current treatment. Then, argue whether or not it should be allowed as a credit. Also, answer each of the following questions regarding your selected tax credit: Do you feel that it favors one ..

What is the ratio of debt to total long-term capital : A firm has a long-term debt–equity ratio of 0.50. Shareholders’ equity is $2.0 million. Current assets are $320,000, and total assets are $3.200 million. If the current ratio is 1.6, what is the ratio of debt to total long-term capital?

Mutual fund-annual rate of return : Suppose you are committed to owning a $207,000 Ferrari. If you believe your mutual fund can achieve a 13 percent annual rate of return and you want to buy the car in 10 years on the day you turn 30, how much must you invest today?

User Account

All Pages