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Net cash flow and timeline depiction

Net cash flow and timeline depiction

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Net cash flow and timeline depiction 

1. Net cash flow and timeline depiction For each of the following projects, determine the net cash flows, and depict the cash flows on a time line. a. A project that requires an initial investment of $124,000 and will generate annual operating cash inflows of $21,000 for the next 20 years. In each of the 20 years, maintenance of the project will require a $5,400 cash outflow. b. A new machine with an installed cost of $89,000. Sale of the old machine will yield $35,000 after taxes. Operating cash inflows generated by the replacement will exceed the operating cash inflows of the old machine by $22,000 in each year of a 6-year period. At the end of year 6, ligquidation of the new machine will yield $22,000 after taxes, which is $12,000 greater 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 $3 million and will yield annual operating cash inflows of $300,000 for each of the next 14 years. Operating cash outlays will be $19,000 for each year except year 5, when an overhaul requiring an additional cash outlay of $501,000 will be required. The asset's liquidation value at the end of year 14 is expected to be zero. a. A project that requires an initial investment of $124,000 and will generate annual operating cash inflows of $21,000 for the next 20 years. In each of the 20 years, maintenance of the project will require a $5,400 cash outflow. (Select all the choices that apply.) O A. This is a conventional cash flow pattern, where the cash inflows are of equal size, which is referred to as an annuity. O B. Year 18 19 20 Cash flow - $124,000 $15,600 $15,600 $15,600 $15,600 $15.600 $15,600 O C. At year 0, the initial investment will be - $124,000. For each of the years 1 thru 20, the net cash flow wilIl be $21,000. O D. At year 0, the initial investment will be - $124,000. For each of the years 1 thru 20, the net cash flow will be $21,000 - $5,400 = $15,600. b. A new machine with an installed cost of $89,000. Sale of the old machine will yield $35,000 after taxes. Operating cash inflows generated by the replacement will exceed the operating cash inflows of the old machine by $22,000 in each year of a 6-year period. At the end of year 6, ligquidation of the new machine will yield $22,000 after taxes, which is $12,000 greater than the after-tax proceeds expected from the old machine had been retained and liquidated at the end of year 6. (Select all the choices that apply.) ПА. Year 1 2. 3 4 5 Cash flow - $54,000 $22,000 $22,000 $22,000 $22,000 $22,000 $22,000 Пв. Yеar 1 3 4 Cash flow - $54,000 $22,000 $22,000 $22,000 $22,000 $22,000 $34,000 O C. At year 0, the initial investment will be - $89,000 + $35,000 = - $54,000. For each of the years 1 thru 5, the net cash flow will be $22,000. year 6, the net cash flow will be $22,000 + $22,000 – $10,000 = $34,000. O D. This is a conventional cash flow pattern, where the subsequent cash inflows vary, which is referred to as a mixed stream. c. An asset that requires an initial investment of $3 million and will yield annual operating cash inflows of $300,000 for each of the next 14 years. Operating cash outlays will be $19,000 for each year except year 5, when an overhaul requiring an additional cash outlay of $501,000 will be required. The asset's liquidation value at the end of year 14 is expected to be zero. (Select all the choices that apply.) O A. Year 4 6 13 14 Cash flow $281,000 $281,000 - $201,000 $281,000 $281,000 $281,000 -$3 million O B. At year 0, the initial investment will be - $3,000,000. For each of the years 1 thru 4 and thru 14, the net cash flow will be $300,000 - $19,000 = $281,000. At year 5, the net cash flow will be $300,000 - $501,000 = - $201,000. O c. At year 0, the initial investment will be - $3,000,000. For each of the years 1 thru 4 and 6 thru 14, the net cash flow will be $300,000. At year 5, the net cash flow will be $300,000 - $501,000 = - $201,000. O D. This is a nonconventional cash flow pattern, with several cash flow series of equal size, which is referred to as an embedded annuity.
Transcribed Image Text:1. Net cash flow and timeline depiction For each of the following projects, determine the net cash flows, and depict the cash flows on a time line. a. A project that requires an initial investment of $124,000 and will generate annual operating cash inflows of $21,000 for the next 20 years. In each of the 20 years, maintenance of the project will require a $5,400 cash outflow. b. A new machine with an installed cost of $89,000. Sale of the old machine will yield $35,000 after taxes. Operating cash inflows generated by the replacement will exceed the operating cash inflows of the old machine by $22,000 in each year of a 6-year period. At the end of year 6, ligquidation of the new machine will yield $22,000 after taxes, which is $12,000 greater 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 $3 million and will yield annual operating cash inflows of $300,000 for each of the next 14 years. Operating cash outlays will be $19,000 for each year except year 5, when an overhaul requiring an additional cash outlay of $501,000 will be required. The asset's liquidation value at the end of year 14 is expected to be zero. a. A project that requires an initial investment of $124,000 and will generate annual operating cash inflows of $21,000 for the next 20 years. In each of the 20 years, maintenance of the project will require a $5,400 cash outflow. (Select all the choices that apply.) O A. This is a conventional cash flow pattern, where the cash inflows are of equal size, which is referred to as an annuity. O B. Year 18 19 20 Cash flow - $124,000 $15,600 $15,600 $15,600 $15,600 $15.600 $15,600 O C. At year 0, the initial investment will be - $124,000. For each of the years 1 thru 20, the net cash flow wilIl be $21,000. O D. At year 0, the initial investment will be - $124,000. For each of the years 1 thru 20, the net cash flow will be $21,000 - $5,400 = $15,600. b. A new machine with an installed cost of $89,000. Sale of the old machine will yield $35,000 after taxes. Operating cash inflows generated by the replacement will exceed the operating cash inflows of the old machine by $22,000 in each year of a 6-year period. At the end of year 6, ligquidation of the new machine will yield $22,000 after taxes, which is $12,000 greater than the after-tax proceeds expected from the old machine had been retained and liquidated at the end of year 6. (Select all the choices that apply.) ПА. Year 1 2. 3 4 5 Cash flow - $54,000 $22,000 $22,000 $22,000 $22,000 $22,000 $22,000 Пв. Yеar 1 3 4 Cash flow - $54,000 $22,000 $22,000 $22,000 $22,000 $22,000 $34,000 O C. At year 0, the initial investment will be - $89,000 + $35,000 = - $54,000. For each of the years 1 thru 5, the net cash flow will be $22,000. year 6, the net cash flow will be $22,000 + $22,000 – $10,000 = $34,000. O D. This is a conventional cash flow pattern, where the subsequent cash inflows vary, which is referred to as a mixed stream. c. An asset that requires an initial investment of $3 million and will yield annual operating cash inflows of $300,000 for each of the next 14 years. Operating cash outlays will be $19,000 for each year except year 5, when an overhaul requiring an additional cash outlay of $501,000 will be required. The asset's liquidation value at the end of year 14 is expected to be zero. (Select all the choices that apply.) O A. Year 4 6 13 14 Cash flow $281,000 $281,000 - $201,000 $281,000 $281,000 $281,000 -$3 million O B. At year 0, the initial investment will be - $3,000,000. For each of the years 1 thru 4 and thru 14, the net cash flow will be $300,000 - $19,000 = $281,000. At year 5, the net cash flow will be $300,000 - $501,000 = - $201,000. O c. At year 0, the initial investment will be - $3,000,000. For each of the years 1 thru 4 and 6 thru 14, the net cash flow will be $300,000. At year 5, the net cash flow will be $300,000 - $501,000 = - $201,000. O D. This is a nonconventional cash flow pattern, with several cash flow series of equal size, which is referred to as an embedded annuity.
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