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 $95,000. cash flows from increased sales will be $21,900 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.)

Answer 1

The present value of the cash inflows of the project is $1,978,608.

Step-by-step explanation:

To calculate the present value of the cash inflows of the project, we need to discount each cash flow to its present value and then add them up. Since the cash flows are increasing by 4 percent per year, we can use the formula for the present value of a growing perpetuity. The formula is: PV = CF / (r - g), where PV is the present value, CF is the cash flow, r is the discount rate, and g is the growth rate.

Let's calculate the present value of the cash inflows step by step:

1. The first cash flow is $21,900. Using the formula, PV1 = $21,900 / (0.10 - 0.04) = $365,000.
2. The second cash flow is $21,900 × 1.04 = $22,776. Using the formula, PV2 = $22,776 / (0.10 - 0.04) = $379,600.
3. The third cash flow is $22,776 × 1.04 = $23,706.24. Using the formula, PV3 = $23,706.24 / (0.10 - 0.04) = $395,104.
4. The fourth cash flow is $23,706.24 × 1.04 = $24,678.83. Using the formula, PV4 = $24,678.83 / (0.10 - 0.04) = $411,314.
5. The fifth and final cash flow is $24,678.83 * 1.04 = $25,695.43. Using the formula, PV5 = $25,695.43 / (0.10 - 0.04) = $427,590.

Finally, we add up the present values of all the cash flows: $365,000 + $379,600 + $395,104 + $411,314 + $427,590 = $1,978,608.

Therefore, the present value of the cash inflows of the project is $1,978,608.

Answer 2

The present value of the cash inflows of the project can be calculated using the formula:

PV = CF1 / (1 + r)^1 + CF2 / (1 + r)^2 + ... + CFn / (1 + r)^n

Where CFn is the cash flow in year n, r is the required return of 10 percent, and n is the number of years.

Using this formula, the present value can be calculated as follows:

CF1 = $21,900
CF2 = $21,900 * (1 + 4%) = $22,676
CF3 = $22,676 * (1 + 4%) = $23,471
CF4 = $23,471 * (1 + 4%) = $24,287
CF5 = $24,287 * (1 + 4%) = $25,128

PV = $21,900 / (1 + 0.10)^1 + $22,676 / (1 + 0.10)^2 + $23,471 / (1 + 0.10)^3 + $24,287 / (1 + 0.10)^4 + $25,128 / (1 + 0.10)^5
PV = $21,900 / 1.10 + $22,676 / 1.21 + $23,471 / 1.33 + $24,287 / 1.46 + $25,128 / 1.61
PV = 19,909.09 + 18,605.76 + 17,594.58 + 16,661.94 + 15,469.51
PV = $87,640.88

Therefore, the present value of the cash inflows of the project is $87,640.88.