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. |
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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