Question

Manager of a computer company plans to spend on new hardware $1.0 million in the first year with amounts decreasing by $0.5 million each year thereafter. Income of the company is expected to be $6.0 million the first year increasing by $0.1 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%.

Answer 1

The calculation involves finding the net cash flow for each year, based on decreasing hardware expenditures and increasing income, and then using the present value formula to bring these future values to present terms at 10% interest rate, over a period of five years.

Step-by-step explanation:

The problem involves calculating the annual worth over the first five years of the company's net cash flow considering an annual interest rate of 10%. The manager plans to spend on new hardware $1.0 million in the first year, which decreases by $0.5 million each subsequent year. The company's income is expected to be $6.0 million in the first year, increasing by $0.1 million each year thereafter. To find the annual worth of the net cash flow, we must calculate the net cash flow for each year, which is the income minus the hardware expenses, and then we apply the present value formula to each yearly net cash flow to bring it into present value terms. By doing this for each of the five years and summing these present values, we could determine the overall worth of the net cash flow over that period.