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Unformatted text preview: oject’s cash flows are conventional or nonconventional.
LG3 8–3 Relevant cash flow pattern fundamentals For each of the following projects,
determine the relevant cash flows, classify the cash flow pattern, and depict the
cash flows on a time line.
a. A project that requires an initial investment of $120,000 and will generate
annual operating cash inflows of $25,000 for the next 18 years. In each of
the 18 years, maintenance of the project will require a $5,000 cash outflow.
b. A new machine with an installed cost of $85,000. Sale of the old machine
will yield $30,000 after taxes. Operating cash inflows generated by the
replacement will exceed the operating cash inflows of the old machine by
$20,000 in each year of a 6-year period. At the end of year 6, liquidation of
the new machine will yield $20,000 after taxes, which is $10,000 greater 382 PART 3 Long-Term Investment Decisions than the after-tax proceeds expected from the old machine had it been
retained and liquidated at the end of year 6.
c. An asset that requires an initial investment of $2 million and will yield
annual operating cash inflows of $300,000 for each of the next 10 years.
Operating cash outlays will be $20,000 for each year except year 6,
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This document was uploaded on 01/19/2014.
- Fall '13