Question
Hi, I am working with this exercise and I am trying to understand what I marked in bold: At the end of 2015, Uma Corporation
Hi, I am working with this exercise and I am trying to understand what I marked in bold:
At the end of 2015, Uma Corporation is considering undertaking a major long-term
project in an effort to remain competitive in its industry. The production and sales
departments have determined the potential annual cash flow savings that could accrue
to the firm if it acts soon. Specifically, they estimate that a mixed stream of future
cash flow savings will occur at the end of the years 2016 through 2021. The years
2022 through 2026 will see consecutive and equal cash flow savings at the end of
each year. The firm estimates that its discount rate over the first 6 years will be 7%.
The expected discount rate over the years 2022 through 2026 will be 11%.
The project managers will find the project acceptable if it results in present cash
flow savings of at least $860,000. The following cash flow savings data are supplied
to the finance department for analysis.
End of Year Year (n) Cash Flow Present Value End of Year 2021 Present Value Beg of Year 2016
2016 1 $110,000 102,803.74
2017 2 120,000 104,812.65
2018 3 130,000 106,118.72
2019 4 150,000 114,434.28
2020 5 160,000 114,077.79
2021 6 150,000 99,951.33
2022 7 90,000 81,081.08 54,027.75 Formula: 81,081.08 / (1 +0.07)^6 - I need to understand, why
2023 8 90,000 73,046.02 48,673.65 from this point to year 2026
2024 9 90,000 65,807.22 43,850.13 the Present Value Beg. of Year
2025 10 90,000 59,285.79 39,504.62 2016, is calculated using n-6
2026 11 90,000 53,410.62 35,589.75 (year 2021) instead of
332,630.73 863,844.42 continuing with n-7, n-8, n-9,
n-10 & n-11?
I found the following explanation, but I cant understand it still:
We need to discount the cash flows at the end of years 2016 through 2021, at 7% back to the end of year 2015; keeping in mind that, the present values found in the first step, are now at the end of year 2021.
I appreciate your help!
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