Question

Fred Nickerson, gold digger, plans to build a mining operation on his farm. The initial investment will be $100,000 and each year Fred expects to pay $5,000 to maintain the equipment. He will pay his trusty employee Earl $20,000 at the end of the first year and increase Earl's salary $3,000 each subsequent year. Fred expects to make $50,000 in gold sales the first year, and expects his revenues from gold to increase 8% every year after that. At the end of eight-year operation, Fred expects to be able to sell the aging mining equipment for $15,000. Perform calculations using a 9% interest rate. (a) Graphically represent the cash flow as a time line with arrows. (b) What is the present value of Fred's entire business venture, assuming his assumptions are correct? Present the formulas you use in functional notation.