Southern California Publishing Company is trying to decide whether to revise its

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 $75,000. Cash flows from increased sales will be $20,300 the first year. These cash flows will increase by 3 percent per year The book will go out of print four 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 8 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.) Present value

Explanation / Answer

Hi,

To calculate just the cash inflows, we will dscount the cash flows for the 4 ensuing years by the xpected rate of return that is 8%

Year 1: USD 20300

Year 2: USD 20300*1.03

Year 3: USD 20300*1.03^2

Year 4: USD 20300*1.03^3

PV of these cash flows = Year 1/1.08 + Year 2/1.08^2 + Year 3/1.08^3 + Year 4/1.08^4

applyimg the same formulae in excel:

Year 1 2 3 4 Cash flow 20300 20909 21536.27 22182.36 Discounted 18796.3 17926.1 17096.19 16304.7 PV is the sum of these value PV= 70123.27

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