You are thinking of making an investment in a new factory. The factory will generate revenues of $1,110,000 per year for as long as you maintain it. You expect that the maintenance costs will start at $58830 per year and will increase 5% per year thereafter. Assume that all revenue and maintenance costs occur at the end of the year. You intend to run the factory as long as it contrinues to make a positive cash flow ( as long as the cash generated by the plant exceeds the maintainenance costs). The factory can be built and become operational immediately and the interest rate is 6% per year.
a. what is the present value of the revenues
b. what is the present value of the maintenance costs?
c. if the plan costs $11,100,000 to build, should you invest in the factory?