Question

Southern California Publishing Company is trying to decide whether to revise its popular textbook, Financial Psychoanalysis Made Simple. The company has estimated that the revision will cost $90,000. Cash flows from increased sales will be $21,700 the first year. These cash flows will increase by 5 percent per year. The book will go out of print six years from now. Assume that the initial cost is paid now and revenues are received at the end of each year.

  

If the company requires a return of 12 percent for such an investment, calculate the present value of the cash inflows of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

   

Present value

$

Answer 1

Following formula used to calculate present value growing annuity

PV = C {[1/(r – g)] – [1/(r – g)] × [(1 + g)/(1 + r)]^n}

C= cash flow=21700

r=rate of return = 12%

g= growth rate=5%

n= Period

PV= 21700 {[1/(0.12-0.05)] - [1/(0.12-0.05)] × [(1+0.05) /(1+0.12)]^6}

PV= 21700( 14.28571-9.699059)

PV=21700 (4.586655)= 99530.41