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XL Corp
XL Corp. is considering an investment that will require an initial cash outlay of $200,000 to purchase non-depreciable assets. The project promises to return $60,000 per year (after-tax) for eight years with no salvage value. The company's cost of capital is 11 percent.
Refer to XL Corp. (Present value tables needed to answer this question.) The company is uncertain about its estimate of the life expectancy of the project. How many years must the project generate the $60,000 per year return for the company to at least be indifferent about its acceptance? (Do not consider the possibility of partial year returns.)
Expert Solution
Answer:
Dividing $200,000/$60,000, gives the annuity discount factor (3.3333) for 11 percent associated with the minimal required time for this project to be successful. According to the tables in Appendix A, the project will have a positive net present value if the cash flows last through year 5.
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