Question

Revenue from the sale of ergonomic hand tools was $300,000 in years 1 through 4 and $465,000 in years 5 through 9. Determine the equivalent annual revenue in years 1 through 9 at an interest rate of 10% per year.

Answer 1

To determine the equivalent annual revenue, we can use the concept of present value. By discounting the future revenue at an interest rate of 10% per year, we can calculate the equivalent annual revenue.

Using the formula for present value of an annuity, the equivalent annual revenue in years 1 through 9 can be calculated as follows:

PV = C × (1 - (1 + r)^(-n)) / r

Where:
PV = Present value
C = Cash flow per period
r = Interest rate per period
n = Number of periods

In this case, the cash flow per period is the average revenue for each 5-year period, which is ($300,000 + $465,000) / 2 = $382,500.

Plugging in the values, we get:

PV = $382,500 × (1 - (1 + 0.10)^(-9)) / 0.10

Solving this equation will give us the equivalent annual revenue in years 1 through 9.