Question

Southern California Publishing Company is trying to decide whether to revise its popular textbook, Financial Psychoanalysis Made Simple. The company has estimated that the revision will cost $80,000. Cash flows from increased sales will be $20,200 the first year. These cash flows will increase by 4 percent per year. The book will go out of print five years from now. Assume that the initial cost is paid now and revenues are received at the end of each year. If the company requires a return of 10 percent for such an investment, calculate the present value of the cash inflows of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

NPV= 2333.28

Explanation:

Giving the following information:

So we have an initial investment in year 0 of $80,000 and a cash-flow of $20,200 (increase by 4% each year) for five years. Interest rate is 10%

Io= -80000

I1= 20200

I2= 21008

I3= 21848.32

I4= 22722.26

I5= 23631.15

To calculate the net present value we need to use the following formula:

                      n

NPV= -Io + ∑[Ct/(1+i)^n]

                      t-1

NPV= 2333.28