A project requires an initial investment of $10,000$ and over its 5 -year life, it will generate
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Question:
A project requires an initial investment of $10,000$ and over its 5-year life, it will generate annual cash revenues of $5,000 and cash expenses of $2,000. The firm will use straight-line depreciation, but it does not pay taxes.
a. Find the book rates of return on the project for each year.
b. Is the project worth pursuing if the opportunity cost of capital is 8 percent?
c. What would happen to the book rates of return if half the initial $10,000 outlay were treated as an expense instead of a capital investment?
Hint: Instead of depreciating all of the $10,000 treat $5,000 as an expense in the first year.
d. Does NPV change as a result of the different accounting treatments proposed in (c)?
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