A start-up tech services company just opened it\'s doors in the hot Cupertino ma
ID: 1141691 • Letter: A
Question
A start-up tech services company just opened it's doors in the hot Cupertino marketplace, expecting to turn a profit in each of its first four years of service offerings. Gains are expected to be $25 Million in year one, $40 Million in year two, $55 Million in year and $90 Million in year four. An interest rate of 10% per year is forecasted throughout this time. 4. a. Draw the cash flow diagram. b. What is the present worth of the gains for the first three years? c. What is the present worth of the gains for all four years? d. What is the equivalent uniform annual worth of gains through year four?Explanation / Answer
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Answer-
Year
Profit
Discounting rate
Actual yearly Income
1
25
10%
27.5
2
40
10%
44
3
55
10%
60.5
4
90
10%
99
Cash flow
Year 1
Gains
25
Interest income
2.5
Total Yearly income
27.5
Year 2
Gains
40
Interest income
4
Total Yearly income
44
Year 3
Gains
55
Interest income
5.5
Total Yearly income
60.5
Year 4
Gains
90
Interest income
9
Total Yearly income
99
Present worth of the gains for the First 3 year
year 1
Yearly income
25
PV of Yearly income
$22.73
Year 2
Yearly income
40
PV of Yearly income
$33.06
Year 3
Yearly income
55
PV of Yearly income
$41.32
Total PV=
$97.11
Present worth of the gains for all 4 years
year 1
Yearly income
40
PV of Yearly income
$36.36
Year 2
Yearly income
40
PV of Yearly income
$33.06
Year 3
Yearly income
55
PV of Yearly income
$41.32
Year 4
Yearly income
90
PV of Yearly income
$61.47
total PV for all 4 years
$172.22
Equivalent uniform annual worth of the gains through year 4
Total PV of income at year 4
$172.22
Annual worth
$43.05
Hence an annual worth of $43.05 is considered for annual growth across 4 years.
Year
Profit
Discounting rate
Actual yearly Income
1
25
10%
27.5
2
40
10%
44
3
55
10%
60.5
4
90
10%
99
Cash flow
Year 1
Gains
25
Interest income
2.5
Total Yearly income
27.5
Year 2
Gains
40
Interest income
4
Total Yearly income
44
Year 3
Gains
55
Interest income
5.5
Total Yearly income
60.5
Year 4
Gains
90
Interest income
9
Total Yearly income
99
Present worth of the gains for the First 3 year
year 1
Yearly income
25
PV of Yearly income
$22.73
Year 2
Yearly income
40
PV of Yearly income
$33.06
Year 3
Yearly income
55
PV of Yearly income
$41.32
Total PV=
$97.11
Present worth of the gains for all 4 years
year 1
Yearly income
40
PV of Yearly income
$36.36
Year 2
Yearly income
40
PV of Yearly income
$33.06
Year 3
Yearly income
55
PV of Yearly income
$41.32
Year 4
Yearly income
90
PV of Yearly income
$61.47
total PV for all 4 years
$172.22
Equivalent uniform annual worth of the gains through year 4
Total PV of income at year 4
$172.22
Annual worth
$43.05
Hence an annual worth of $43.05 is considered for annual growth across 4 years.
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