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 project

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

Explanation / Answer

We will calculate the present value of future cash flows as below:

Year 1. Cash flow =20,300

Year 2 Cash flow=P(1+R/100)=20,300(1+0.03)=20,909

Year 3 Cash flow =P(1+R/100)=20909(1+0.03)=21,536.27

Year 4 Cash flow=P(1+R/100)=21536.27(1+0.03)=22,182.35

Total return in 4 years from now=20,300+20,909+21,536.27+22,182.35=84,927.62

Expected return from investment =8 % on 75,000=81,000

Present value of the project=84,927.62

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