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%.

Homework Answers

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

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