Question: An investment would require an initial outlay of $600,000. Returns over the next 8 years would be uncertain, but $ 140,000 per year is deemed to be a reasonable estimate. The cost of capital for the company is 13 percent.
(a) Derive the net present value of the investment.
(b) Do a sensitivity analysis, one variable at a time, that illustrates the effect on the net present value of changes in:
(i) the amount of anticipated annual cash inflows, and
(ii) the number of years that the inflows will last. Plot the project's net present value as a function of these variables and identify break-even points.