Question

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%.

Answer 1

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