Scarecrow Manufacturing will need to begin paying a licensing fee of $5697 at th

Question

Scarecrow Manufacturing will need to begin paying a licensing fee of $5697 at the end of year 6. Scarecrow will have to pay the licensing fee for 8 years, but the fee will decrease each year by $123. Scarecrow wants to spread out this cost so it would like to make equal deposits in each year before the first payment. (In other words, by the time of the first payment, Scarecrow will have all of the money saved.)The bank account pays 6% interest compounded annually. How much does Scarecrow need to deposit each year before the first payment to cover the entire cost of the licensing fees?

Explanation / Answer

As seen from above table, at the end of year 6, PV of future (next 8 year's) cash flow = $32,937

Present value of this amount at year 0 = $32,937 / (1.06)6 = $23,219

If annual deposit required to accummulate $23,219 be A, then

$23,219 = A x Present value interest factor of annuity (6%, 6 years)

= A x 4.9173 (From PVIFA table)

A = $23,219 / 4.9173 = $4,722 (Rounded off to nearest dollar)

AT END of YEAR 6 Year Cash Flow ($) Discount Factor@6% Discounted CF ($) 1 5,697 0.94 5,375 2 5,574 0.89 4,961 3 5,451 0.84 4,577 4 5,328 0.79 4,220 5 5,205 0.75 3,889 6 5,082 0.70 3,583 7 4,959 0.67 3,298 8 4,836 0.63 3,034 PV at end of Year 6 = 32,937

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.