Assume a required rate of return and an inflation rate
Consider two projects, known as Project A and Project B. Project A requires an initial investment of $1M and is expected to last 8 years. It will have operating expenses of $200k in year 1 and gross receipts of $210k (treat all cash flows as if they occur in a lump at the end of the year, so the $200k and $210k cash flows may be assumed to occur one year from today). In each of years 2-5, it will have expenses of $50k with gross receipts of $225k. Year 6 requires a $200k capital improvement along with operating expenses of $75k and gross receipts are expected to be $200k. Years 7-8 show expected expenses of $100k (each year) with gross receipts of $50k and $25k, respectively. Year 8 will have liquidation proceeds (salvage value) of $75k. Project B requires an initial investment of $500k and is expected to last 6 years. It will have operating expenses of $400k in year 1 and gross receipts of MGT5017 Midterm June 2015 2/2 $405k. In each of years 2-5, it will have expenses of $150k with gross receipts of $450k. Year 3 will require a refurbishment of equipment at an expected cost of $600k. Year 6 offers expected operating expenses of $75k, and gross receipts are expected to be $200k. Because of EPA regulations, year 6 will also show a site clean up and disposal expense of $200k. Assume a required rate of return of 20% and an inflation rate of 3%. Base your answers to the following strictly on financial considerations
