Reference no: EM131091181

Mideque, Inc., is considering a project to produce pens. It is estimated that the initial cost of the equipment, including transportation, installation, and so forth, will be $24,000. Mideque also estimates that the revenues (sales) each year over the five-year life of the project will be 15,000. The other yearly expense (e,g., cost of goods sold, wages and salaries, etc., will be $7,000. Mideque will finance $9,000 by loan with an interest rate of 15 percent year. The loan will be repaid at the rate of $2000 per year plus interest on the remaining balance each year. Mideque uses straight-line depreciation, and the equipment will have no salvage value at the end of its life. Assume a corporate-profits tax rate of 50 percent. Assume that the working capital requirement will be $1,000 and that the IRS allows an investment tax credit of 8 percent for this kind of project. Also, assume that at the end of the life of this project the equipment can be sold for $4,000. Obtain the annual cash flow of the first four periods. Also compute the initial investment.