It is estimated that a steel manufacturer will produce 1,000 tons of steel during the coming year. Profit each year is expected to be $150 perton, so that at the end of the first year the total profit will be $150,000. As a result of improvements in technology, production isexpected to increase by 80 tons per year thereafter in each of the following five years (years 2 – 6).
a. Draw a cash flow diagram for this operation from the company’s viewpoint that shows the profit earned each year.
b. If the company can earn 7% per year on its capital, what is the future equivalent of the manufacturer’s cash flow at the end of year six?