Tangshan Mining Company, with a cost of capital of 10 percent, is considering investing in project A, with an initial investment of $1,000,000. Project A is expected to provide equal cash inflows over its 15 year useful life. Based on this information, the breakeven cash inflow for the project is
A) $1,000,000.
B) $131,474.
C) $100,000.
D) none of the above.

Question

Quizplus · Accepted Answer

The breakeven cash inflow is the amount of cash inflow needed to recover the initial investment of $1,000,000 at a 10% cost of capital. To calculate this, we can use the formula for present value of an annuity: PV = C * [1 - (1+r)^-n] / r, where PV is the present value, C is the cash inflow, r is the cost of capital, and n is the number of periods.

Solving for C, we get: C = PV * r / [1 - (1+r)^-n] = 1,000,000 * 0.1 / [1 - (1+0.1)^-15] = $131,474. Therefore, the breakeven cash inflow for Project A is $131,474 per year for 15 years.

Tangshan Mining Company, with a Cost of Capital of 10