Question

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 $75,000. Cash flows from increased sales will be $20,900 the first year. These cash flows will increase by 3 percent per year. The book will go out of print four 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 8 percent for such an investment, calculate the present value of the cash inflows of the project.

Answer 1

Answer:

$72,195.71

Explanation:

Calculation to determine  the present value of the cash inflows of the project

Using this formula

PV = C {[1/(r – g)] – [1/(r – g)] × [(1 + g)/(1 + r)]^n}

Where,

C represent cash flow=$20,900

r represent rate of return = 8%

g represent growth rate=3%

n represent Period

Let plug in the formula

PV= $20,900*{[1/(0.08-0.03)] - [1/(0.08-0.03)] × [(1+0.03) /(1+0.08)]^4}

PV= $20,900*{20-[20*(1.03/1.08)^4]}

PV= $20,900*[20-(20*0.827283)]

PV= $20,900*(20-16.54566)

PV= $20,900*3.45434

PV= $72,195.71

Therefore the present value of the cash inflows of the project will be $72,195.71