Reference no: EM132253429

You are the manager of a local factory that produces plastic bottles for soft drink manufacturers. Your colleague brings an assembly line project to a meeting with the following data:  

Estimated life of assembly line:                     5 years

Initial investment cost:                                  $740,000

Estimated salvage value:                               none

Current interest rates:                                    15 percent

Estimated Cash Flow Analysis

Year                                      Expected Cash Flow

1                                             $360,000

2                                             240,000

3                                             100,000

4                                               25,000

5                                               20,000

a) As your colleague begins going through the analysis with the CEO, you wait until he pauses and state, "I can tell already this is not an investment we should pursue."  Your colleague asks how you could possible know that from looking at the data for one minute. How DO you know?

b) Suppose you are given the same assembly line data, but now interest rates have fallen to 0.05 percent. Do you think the company should purchase the new line? How can you know that for certain?