Solution:-
First we compute Present worth of the cash flows as computed below.
Year |
Cash flow ($) |
PV Factor at 13% |
Discounted cash flow ($) |
(A) |
(B) |
( A * B) |
|
0 |
$20,000 |
1 |
$20,000 |
1 |
-$5,000 |
0.8850 |
-$4336.5 |
2 |
-$5,000 |
0.7831 |
-$3915.5 |
3 |
-$8,000 |
0.6931 |
-$5544.8 |
4 |
-$11,000 |
0.6133 |
-$6746.3 |
5 |
-$14,000 |
0.5428 |
-$7599.2 |
6 |
-$17,000 |
0.4803 |
-$8165.1 |
Present worth ($) = |
-9467.4 |
Equivalent annual worth = Present worth / PVIFA (13%, 6) = - $9,467.4 / 3.998 = - $2368.03
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