Company X is planning to run a project that requires an initial investment of RM 80,000. Operation cost is estimated at RM 20,000 per year starting one year from the start of the project until its project life. Starting second year onwards, the operation cost is expected to increase by RM 5,000 from previous year. The project will start to generate its annual income of RM 70,000 on the second year until fifth year. The salvage value of the project is RM 50,000 and its project life is five years. a) Construct the cash flow diagram to summarize the above transactions. b) Determine the expected project value at the end of five years. Assume the growth rate is 12%.
Company X is planning to run a project that requires an initial investment of RM 80,000. Operation cost is estimated at RM 20,000 per year starting one year from the start of the project until its project life. Starting second year onwards, the operation cost is expected to increase by RM 5,000 from previous year. The project will start to generate its annual income of RM 70,000 on the second year until fifth year. The salvage value of the project is RM 50,000 and its project life is five years. a) Construct the cash flow diagram to summarize the above transactions. b) Determine the expected project value at the end of five years. Assume the growth rate is 12%.
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 15P
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Transcribed Image Text:2.1 Company X is planning to run a project that requires an initial investment of RM 80,000.
Operation cost is estimated at RM 20,000 per year starting one year from the start of the
project until its project life. Starting second year onwards, the operation cost is expected
to increase by RM 5,000 from previous year. The project will start to generate its annual
income of RM 70,000 on the second year until fifth year. The salvage value of the project
is RM 50,000 and its project life is five years.
a) Construct the cash flow diagram to summarize the above transactions.
b) Determine the expected project value at the end of five years. Assume the growth rate
is 12%.
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