Answer:
The present value is $395,354.84
Explanation:
The computation of the Present value is shown below
= Present value of all yearly cash inflows after applying discount factor
The discount factor should be computed by
= 1 ÷ (1 + rate) ^ years
where,
rate is 7.25%
Year = 0,1,2,3,4 and so on
Discount Factor:
For Year 1 = 1 ÷ 1.0725 ^ 1 = 0.9324
For Year 2 = 1 ÷ 1.0725 ^ 2 = 0.8694
For Year 3 = 1 ÷ 1.0725 ^ 3 = 0.8106
For Year 4 = 1 ÷ 1.0725 ^ 4 = 0.7558
For Year 5 = 1 ÷ 1.0725 ^ 5 = 0.7047
For Year 6 = 1 ÷ 1.0725 ^ 6 = 0.6571
For Year 7 = 1 ÷ 1.0725 ^ 7 = 0.6127
So, the calculation of a Present value of all yearly cash inflows are shown below
= (Year 1 cash inflow × Present Factor of Year 1) + (Year 2 cash inflow × Present Factor of Year 2) + (Year 3 cash inflow × Present Factor of Year 3) + (Year 4 cash inflow × Present Factor of Year 4) + (Year 5 cash inflow × Present Factor of Year 5) + (Year 6 cash inflow × Present Factor of Year 6) + (Year 7 cash inflow × Present Factor of Year 7)
= ($74,000 × 0.9324
) + ($74,000 × 0.8694 ) + ($74,000 × 0.8106
) + ($74,000 × 0.7558
) + ($74,000 × 0.7047 ) + ($74,000 × 0.6571
) + ($74,000 × 0.6127 )
= $68,997.67 + $64,333.49 + $59,984.61 + $55,929.70 + $52,148.91 + $48,623.69 + $45,336.77
= $395,354.84
We take the first four digits of the discount factor.
