Question

The following information pertains to an investment: Investment $140,000 Annual revenues $96,000 Annual variable costs $32,000...

The following information pertains to an investment:

Investment

$140,000
Annual revenues

$96,000
Annual variable costs

$32,000
Annual fixed out-of-pocket costs

$20,000
Discount rate

12%
Expected life of project

8 years

The present value of the annual cash flow (rounded) is

a.

$136,822.
b.

$218,592.
c.

$204,884.
d.

$152,538.
Business   Accounting   
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Homework Answers

Answer #1

The present value of the annual cash flow

Annual cash inflow = Annual revenues - Annual variable costs - Annual fixed out-of-pocket costs

= $96,000 - $32,000 - $20,000

= $44,000

Therefore, the present value of the annual cash flow = Annual cash flow x Present value annuity factor at 12% for 8 Years

= Annual cash flow x [PVIFA 12%, 8 Years]

= $44,000 x 4.968

= $218,592

“Hence, the present value of the annual cash flow will be $218,592”

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)n} / r], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.

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