Southern California Publishing Company is trying to decide whether to revise its popular textbook, Financial Psychoanalysis Made Simple. The company has estimated that the revision will cost $95,000. Cash flows from increased sales will be $21,900 in the first year. These cash flows will increase by 4 percent per year. The book will go out of print five years from now. Assume that the initial cost is paid now and revenues are received at the end of each year. If the company requires a return of 10 percent for such an investment, calculate the present value of the cash inflows of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
| Computation of present value of cash flow | |||||
| Cash flow will start from year 5 = | 21,900 | ||||
| Increase in cash flow = | 4% | ||||
| Present value of cash flow at the end of 5th year= | Year 6th cash flow/(required rate - growth rate) | ||||
| 21900*104%/(10%-4%) | |||||
| 379600 | |||||
| Present value today = | 379600/(1+10%)^5 | ||||
| Present value today = | $ 235,701.73 | ||||
| Answer = | $ 235,701.73 |
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