Question

A company will make $74,000 in annual revenue each year for the next seven years from a new investment. The interest rate of 7.25 percent per year is appropriate for investments of this risk. Calculate the present value. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

The present value is $395,354.84

Step-by-step explanation:

The computation of the Present value is shown below

= Present value of all yearly cash inflows after applying discount factor

The discount factor should be computed by

= 1 ÷ (1 + rate) ^ years

where,

rate is 7.25%

Year = 0,1,2,3,4 and so on

Discount Factor:

For Year 1 = 1 ÷ 1.0725 ^ 1 = 0.9324

For Year 2 = 1 ÷ 1.0725 ^ 2 = 0.8694

For Year 3 = 1 ÷ 1.0725 ^ 3 = 0.8106

For Year 4 = 1 ÷ 1.0725 ^ 4 = 0.7558

For Year 5 = 1 ÷ 1.0725 ^ 5 = 0.7047

For Year 6 = 1 ÷ 1.0725 ^ 6 = 0.6571

For Year 7 = 1 ÷ 1.0725 ^ 7 = 0.6127

So, the calculation of a Present value of all yearly cash inflows are shown below

= (Year 1 cash inflow × Present Factor of Year 1) + (Year 2 cash inflow × Present Factor of Year 2) + (Year 3 cash inflow × Present Factor of Year 3) + (Year 4 cash inflow × Present Factor of Year 4) + (Year 5 cash inflow × Present Factor of Year 5) + (Year 6 cash inflow × Present Factor of Year 6) + (Year 7 cash inflow × Present Factor of Year 7)

= ($74,000 × 0.9324 ) + ($74,000 × 0.8694 ) + ($74,000 × 0.8106 ) + ($74,000 × 0.7558 ) + ($74,000 × 0.7047 ) + ($74,000 × 0.6571 ) + ($74,000 × 0.6127 )

= $68,997.67 + $64,333.49 + $59,984.61 + $55,929.70 + $52,148.91 + $48,623.69 + $45,336.77

= $395,354.84

We take the first four digits of the discount factor.