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Homework answers / question archive / A project in Malaysia costs $5,000,000

A project in Malaysia costs $5,000,000

Finance

A project in Malaysia costs $5,000,000. Over the next 4 years, the project will generate total operating cash flows of $4,700,000, measured in today's dollars using a required rate of return of 12 percent.  (1) Calculate the break-even salvage value of this project?  (2) Should the company go ahead with the project?  Why or why not?

 

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Computation of Break-even Salvage Value of the Project:
   
At Breakeven Point  
Present Value of Cash Outflows = Present Value of Cash Inflows  
Costs of Project = PV of operating cash flows + PV of Salvage Value  
$5,000,000 = $4,700,000 + PV of Salvage Value  
$300,000 = PV of Salvage Value  
Salvage Value = 300,000/.6355 = $472,055.81  
   
Time PVF
1 0.8929
2 0.7972
3 0.7118
4

0.6355

 

1) Salvage Value of the Project is $472,055.81

2) As salvage Value is positive. The company should go ahead with project.

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