2. Revenue from the sale of ergonomic hand tools was $350,000 in years 1 through 3...

2. Revenue from the sale of ergonomic hand tools was $350,000 in years 1 through 3 and $450,000 in years 4 through 9. Determine the equivalent annual revenue in years 1 through 9 at an interest rate of 12% per year (show the cash flow diagrams for full credit)

Solutions

Expert Solution

Calculation of Present Value of Revenues
Year	Revenue	Discount Factor @12%	Discounted Cash Flows
A	B	C = 1/(1+12%)^A	*D = BC**
1	350000	0.892857143	312500
2	350000	0.797193878	279017.8571
3	350000	0.711780248	249123.0867
4	450000	0.635518078	285983.1353
5	450000	0.567426856	255342.0851
6	450000	0.506631121	227984.0045
7	450000	0.452349215	203557.1469
8	450000	0.403883228	181747.4526
9	450000	0.360610025	162274.5112
Present Value	2157529.279
n = 9 years
r = interest rate = 12%
PV = $2,157,529.279
Equivalent Annual Revenue = [r* PV] / [1 - (1+r)^-n]
= [12% * $2,157,529.279] / [1 - (1+12%)^-9]
= $258,903.5135 / 0.639389975
= $404,922.6977
Therefore, Equivalent Annual revenue is $404,922.70

jeff jeffy answered 2 years ago

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