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Anewpowerlinewillcost$100,000toinstall,withpowercostsexpectedtobe$1000 peryearforthefirst2years,$800foryears3and4and$600foryear5and$400for year6.Sincethesiteistemporary,itwillbeabandonedin6years.Itwillcost$5000to dismantlethepowerlinesbutthewastecanbesoldforasalvagevalueof$6000. Tabulateordrawtheappropraitecashflowforthesituuationabove.

Question

Anewpowerlinewillcost100,000toinstall,withpowercostsexpectedtobe100,000toinstall,withpowercostsexpectedtobe1000 peryearforthefirst2years,800foryears3and4and800foryears3and4and600foryear5and400foryear6.Sincethesiteistemporary,itwillbeabandonedin6years.Itwillcost400for year6.Sincethesiteistemporary,itwillbeabandonedin6years.Itwillcost5000to dismantlethepowerlinesbutthewastecanbesoldforasalvagevalueof$6000. Tabulateordrawtheappropraitecashflowforthesituuationabove.

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Solution

Here is the cash flow table for the situation described:

Year Cash Flow ($)
0 -100,000
1 -1,000
2 -1,000
3 -800
4 -800
5 -600
6 -400 + 6,000 - 5,000 = 600

Please note that in year 0, the cost is 100,000fortheinstallationofthepowerline.Forthefirsttwoyears,thecostis100,000 for the installation of the power line. For the first two years, the cost is 1,000 per year. For years 3 and 4, the cost is 800peryear.Foryear5,thecostis800 per year. For year 5, the cost is 600. For year 6, the cost is 400forthepower,400 for the power, 5,000 for dismantling the power lines, but there is a gain of 6,000fromthesalvagevalueofthewaste.So,thenetcashflowforyear6is6,000 from the salvage value of the waste. So, the net cash flow for year 6 is 600.

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