You are the manager of a local factory that produces plasticbottles for soft drink manufacturers. Your colleague brings anassembly line project to a meeting with the followingdata:
Estimated life of assemblyline: 5 years
Initial investmentcost: $740,000
Estimated salvagevalue: none
Current interestrates: 15 percent
Estimated Cash Flow Analysis
Year Expected Cash Flow
1 $360,000
2 240,000
3 100,000
4 25,000
5 20,000
a) As your colleague begins going through the analysis with theCEO, you wait until he pauses and state, “I can tell already thisis not an investment we should pursue.” Your colleagueasks how you could possible know that from looking at the data forone minute. How DO you know?
b) Suppose you are given the same assembly line data, but nowinterest rates have fallen to 0.05 percent. Do you think thecompany should purchase the new line? How can you know that forcertain?
