Problem - Alpha Company plans to expand into a new geographic area. The executives and shareholders expect the following events to take place over a two-year period and the events actually take place. So, I am saying that the expectations are actually realized.
Year 1
January 1: Issue stock for $10,000 cash Purchase equipment for $8,000. The equipment is depreciated straight line over 2 years with no salvage value. Purchase inventory for $2,000 cash
December 31: Sell all the inventory for $8,000 cash
Year 2
January 1: Purchase additional inventory for $2,000
December 31: Sell all the inventory for $8,000
Pay out all the cash as dividends.
Assume the appropriate discount rate is 10%. What is the present value of the project from the point of view of the person who purchased the stock?