Question

A project is to require $1,300 in capital investment. It will save the company $600 annually (income) and have an annual expense (operating cost)of $ 100. The salvage value will be $250. The project will last 4 years and the discount rate will be 10%. Calculate the total expected net cash flow for the project.

Answer 1

To determine the project's total expected net cash flow, calculate the present value of annual net income, annual expenses, and the salvage value using the discount rate. Sum these values and subtract the initial investment to find the net cash flow.

Step-by-step explanation:

To calculate the total expected net cash flow for the project, we need to account for the initial investment, the annual income and expenses, and the salvage value at the end of the project. We also need to consider the time value of money using the given discount rate of 10%.

The project requires a $1,300 capital investment at the start. Each year, the project is expected to generate $600 in income and incur $100 in expenses, resulting in an annual net cash flow of $500. Over four years, these cash flows will need to be discounted back to their present values.

The salvage value of $250 at the end of year 4 must also be discounted back to present value. To calculate the present value of these cash flows, we can use the present value formula:

1. 
   
3. Calculate the present value of annual net cash flows by dividing $500 by (1 + 0.10)n, where n is the year number (1 through 4).
4. 
   
6. Calculate the present value of salvage value by dividing $250 by (1 + 0.10)4.
7. 
   
9. Sum all the present values to obtain the total present value of the cash flows.
10. 
    
12. Subtract the initial investment of $1,300 to get the total expected net cash flow for the project.

By performing these calculations, the total expected net cash flow for the project can be determined, which will help in evaluating the financial viability of the project.