An engineering company needs to decide whether or not to build a new factory. The costs of building the factory are $150 million initially, together with a further $100 million at the end of the next 2 years. Annual operating costs are $5 million commencing at the end of the third year. Annual revenue is predicted to be $50 million commencing at the end of the third year. If the interest rate is 6% compounded annually, fi nd (a) the present value of the building costs (b) the present value of the operating costs at the end of n years ( n > 2) (c) the present value of the revenue after n years (n > 2)
An engineering company needs to decide whether or not to build a new factory. The costs of building the factory are $150 million initially, together with a further $100 million at the end of the next 2 years. Annual operating costs are $5 million commencing at the end of the third year. Annual revenue is predicted to be $50 million commencing at the end of the third year. If the interest rate is 6% compounded annually, fi nd (a) the present value of the building costs (b) the present value of the operating costs at the end of n years ( n > 2) (c) the present value of the revenue after n years (n > 2)
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 4P
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An engineering company needs to decide whether or not to build a new factory. The costs of building the factory are $150 million initially, together with a further $100 million at the end of the next 2 years. Annual operating costs are $5 million commencing at the end of the third year. Annual revenue is predicted to be $50 million commencing at the end of the third year. If the interest rate is 6% compounded annually, fi nd
(a) the present value of the building costs
(b) the present value of the operating costs at the end of n years ( n > 2)
(c) the present value of the revenue after n years (n > 2)
(d) the minimum value of n for which the
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