Question

# Manager of a computer company plans to spend on new hardware \$1.0 million in the first...

Manager of a computer company plans to spend on new hardware \$1.0 million in the first year with amounts decreasing by \$0.6 million each year thereafter. Income of the company is expected to be \$6.0 million the first year increasing by \$0.4 million each year thereafter. Determine the annual worth over the years 1 through 5 of the companies net cash flow at annual interest rate of 10%.

Working notes:

• Net cash flow = Annual income - Annual cost
• Annual income, year N = Annual income, year (N - 1) + \$0.4 million
• Annual cost, year N = Annual cost, year (N - 1) - \$0.4 million

First, we compute Present worth of net cash flows as follows. Note that PV Factor in year N = (1.10)-N.

 Year Income (\$M) Cost (\$) Net cash flow (\$M) PV factor @10% Discounted Net cash flow (\$M) 1 6 1 5.00 0.9091 4.55 2 6.4 0.4 6.00 0.8264 4.96 3 6.8 -0.2 7.00 0.7513 5.26 4 7.2 -0.8 8.00 0.6830 5.46 5 7.6 -1.4 9.00 0.6209 5.59 PW of NCF (\$M) = 25.82

Annual worth = Present worth / P/A(10%, 5) = \$25.82 million / 3.7908** = \$6.81 million

**From P/A factor table

#### Earn Coins

Coins can be redeemed for fabulous gifts.