Question

In: Finance

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 = 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

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