Q.7 (4 Points) A company is examining its cash flow requirements for the next 6

Question

Q.7 (4 Points) A company is examining its cash flow requirements for the next 6 years. The company expects to replace office machines and computer equipment at various times over the 6-year planning period. Specifically, the company expects to spend $9000 2 years from now, $12000 3 years from now, and $8000 6 years from now. What is the present worth (with respect to today's dollars) of the expenditures if the inflation rate over the 6-year period is 4% per year and interest rate of 15% per year?

Explanation / Answer

Relevant discount rate is the Real discount rate, calculated as follows:

Real discount rate (interest rate) = Nominal interest rate - Inflation rate = 15% - 4% = 11%

Present worth = $9,000 x P/F(11%, 2) + $12,000 x P/F(11%, 3) + $8,000 x P/F(11%, 6)

= $9,000 x 0.8116** + $12,000 x 0.7312** + $8,000 x 0.5346** = $(7,304.40 + 8,774.40 + 4,276.80)

= $20,355.60

**From P/F (or PVIF) factor table

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