When the overhaul expense is included in the calculation

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Reference no: EM131088062

Consider the following proposed plant. The initial cost is $208 mm; however, ten (10) years after initiation, there will be a need for a major, one time only, overhaul which will cost $20 mm. The life of the plant is considered to be infinite and the first net benefit of $13 mm is to be collected one year after the project is undertaken. During the life of the plant, the yearly net cash benefits are expected to grow at the rate of three (3) percent per year. Please ignore taxes and depreciation.

a) If the ten (10) year overhaul is considered an extra expense and not part of the “normal” net cash benefit, will there be a positive or negative cash flow in year ten (10) when the overhaul expense is included in the calculation? Please show your work.

Reference no: EM131088062

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