Question: The Pre-Tech Company is currently considering the …
The Pre-Tech Company is currently considering the purchase of some new machinery. The machinery will have a useful life-time of 9 years and will cost $ 600,000 to be paid in the current period. If it decides to purchase it, the company expects that the new machinery will generate an initial cash flow of $100 000 one year from now. The cash flow is expected to grow at the rate of 4% per year for years 2 through 4, but then to decline at the rate of 2% per year for years 5 through 9 at which time the machinery will be scrapped. (Assume that the scrap value is zero.) The appropriate discount rate for this project is 16%. Is this project worth undertaking? Draw the timeline.
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