Question

Mideque, Inc., is considering a project to produce pens. It is estimated that the initial cost of the equipment, including transportation, installation, and so forth, will be $ 22,692. Mideque also estimates that the revenues (sales) each year over the five-year life of the project will be $14,893. The other yearly expenses (e.g., cost of goods sold, wages and salaries, etc.), will be $6,420. Mideque will finance $9,805 by loan with an interest rate of 13 percent per year. The loan will be repaid at the rate of $1,836 per year plus interest on the remaining balance each year. Mideque uses straight-line depreciation, and the equipment will have no salvage value at the end of its life. Assume a corporate-profits tax rate of 48 percent. Obtain the initial investment.

Answer 1

Initial Investment = Cost of Equipment + Transportation + Installation

= $22,692