Using the Cash flow diagram provided. Demonstrate that the annual worth of one c

Question

Using the Cash flow diagram provided. Demonstrate that the annual worth of one cycle is equivalent to the annual worth one, two, and three cycles. (6pts)

Show your calculations. (The annual worth calculation for each cycle is worth 2 points)

It was my answer but It was incorrect

Annual worth is annual equivalent revenue minus annual expenses, less its equivalent capital recovery

CR=I(A/P,I%,N)- S(A/F ,I%,N)

AW = PW(A/P,I,n) = -500(A/P, 0.15, 4) = -500(0.35027) = -175.135

Please give me a reasonable answer and a calculation using the flowchart.

Explanation / Answer

Step 1: Calculate the Net Present Value of the Cash Flows

The net present value of the cash flows can be calculated with the use oe following formula:

NPV = Cash Flow Year 0 + Cash Flow Year 1/(1+i)^1 + Cash Flow Year 2/(1+i)^2 + Cash Flow Year 3/(1+i)^3 + Cash Flow Year 4/(1+i)^4

Using the values provided in the question, we get,

NPV = - 500 - 150/(1+15%)^1 - 150/(1+15%)^2 - 150/(1+15%)^3 - 150/(1+15%)^4 = -$928.25

_________

Step: 2 Calculate Annual Worth

The annual worth can be calculated as follows:

Annual Worth = NPV/PVIFA(i,n) where PVIFA is Present Value Interest Factor for an Annuity

Annual Worth = -928.25/PVIFA(15%,4) = -928.25/2.855 = -$325.13 (answer)

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