Estimating Cash Flows for Capital Budgeting

Hard Capital Budgeting Cash Flow Estimation

A company is evaluating a potential project that requires an initial investment of $200,000, which will be spent on equipment and installation costs. The project is expected to generate cash flows of $60,000 annually for 5 years. After 5 years, the equipment will have a salvage value of $20,000. The company uses a discount rate of 10% to evaluate its projects.

To properly assess this project, it's crucial to accurately estimate the total cash inflows over the project's life. Considering all relevant cash flows, including the initial investment, annual cash inflows, and salvage value, which of the following scenarios represents the correct estimation of the cash flows for decision-making?

Year 0: -$200,000; Year 1-5: $60,000; Year 5: +$20,000, leading to a total cash flow of -$200,000 + ($60,000 * 5) + $20,000.

Year 0: -$200,000; Year 1-5: $60,000; Year 5: +$20,000, leading to a total cash flow of -$200,000 + ($60,000 * 4) + $20,000.

Year 0: -$200,000; Year 1-5: $60,000; Year 5: +$20,000, leading to a total cash flow of -$200,000 + ($60,000 * 5) - $20,000.

Hint

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