In: Finance
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)
Calculation of Present Value of Revenues | ||||
Year | Revenue | Discount Factor @12% | Discounted Cash Flows | |
A | B | C = 1/(1+12%)^A | D = B*C | |
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 |