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Assume that the machine will produce 1,000 units o...




Assume that the machine will produce 1,000 units of product per year that will sell at $30 each ($30,000). The revenue received for these units of product are cash inflows. At the same time the machine will create cash outflows or costs - the labor needed to operate it, electricity expenses, maintenance costs, etc. These are examples of cash outflows. Assume per year these outflows are $10,000. If so, your net inflow per year is $20,000 ($30,000 in cash inflows less $10,000 of outflows)! I hope this helps you better understand the concept of cash inflows and outflows for a project. As you approach the exercises you will note that at the beginning usually companies have a large outflow - the initial project investment. For instance, in the case of a new machine, this investment will be the initial cost of the machine. This initial investment and any net outflows subsequently are expressed as negative amounts, e.g. -$20,000. Class, it is important that you practice thse ideas on your own. Let's assume that the "Project" is a new manufacturing plant. Costs associated with the project are $4 million to build the plant and $1 of costs to run the plant every year. This would include the cost of electricity, water, labor, and other miscellaneous expenses. You expect to produce and sell 30 million parts every year for revenues of $5 million a year. The manufacturing and selling costs of your parts are $1 million per year. Assuming there are NO other costs or revenues and that this project is to run for 10 years: 1. What are the cash inflows and outflows for year 0 and years 1 to 10? 2. What is the net present value of the project if the required rate of return (also known as the discount rate or cost of capial) is 10%? 3. Should this project be accepted?


Paper#2483 | Written in 18-Jul-2015

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