A company makes an investment in a new product costing $574,000 and is expected

Question

A company makes an investment in a new product costing $574,000 and is expected to have a service life of 10 years.  
If it is expect to generate the following profits:
1- $175K, 2 - $185K,     3- $125K, 4- $125K, 5- $140K 6- $220K, 7-10 $150K  
and the project is evaluated at a rate of 4%,  
What is the present value of the project & the annual equivalent?

A.

PV                      AE

$622,670               $56,710

B.

PV                      AE

$639,315               $78,822

C.

None of These

D.

PV                      AE

$702, 540              $86, 617

E.

PV                      AE

$732,540               $66, 617

Explanation / Answer

Correct option (D).

PV computed as follows.

AE ($) = PV x A/P(4%, 10)**

= 702,540 x 0.12 = 84,305

Note: The difference is due to rounding off error.

**A/P(r%, N) = Capital recovery factor

Year Cash flow ($) Discount factor (PVIF) at 4% Discounted cash flow ($) (A) (B) (A) x (B) 0 -5,74,000 1.0000 -5,74,000 1 1,75,000 0.9615 1,68,269 2 1,85,000 0.9246 1,71,043 3 1,25,000 0.8890 1,11,125 4 1,25,000 0.8548 1,06,851 5 1,40,000 0.8219 1,15,070 6 2,20,000 0.7903 1,73,869 7 1,50,000 0.7599 1,13,988 8 1,50,000 0.7307 1,09,604 9 1,50,000 0.7026 1,05,388 10 1,50,000 0.6756 1,01,335 Present value (PV) ($) = 7,02,540

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