Q7 4 Points A company is examining its cash flow replace off

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

Solution

Relevant interest rate is the real interest rate, computed as

Real 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