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 $20,900 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 cash inflows of the project.

$72,195.71

Explanation:

Calculation to determine  the present value of the cash inflows of the project

Using this formula

PV = C {[1/(r – g)] – [1/(r – g)] × [(1 + g)/(1 + r)]^n}

Where,

C represent cash flow=$20,900

r represent rate of return = 8%

g represent growth rate=3%

n represent Period

Let plug in the formula

PV= $20,900*{[1/(0.08-0.03)] - [1/(0.08-0.03)] × [(1+0.03) /(1+0.08)]^4}

PV= $20,900*{20-[20*(1.03/1.08)^4]}

PV= $20,900*[20-(20*0.827283)]

PV= $20,900*(20-16.54566)

PV= $20,900*3.45434

PV= $72,195.71

Therefore the present value of the cash inflows of the project will be $72,195.71

cognitive overload: having a lot on your mind impairs decision-making and tends to result in the simplest, but not necessarily best, option being selected.

empathy gaps: overlooking how you might feel in a different situation can result in unnecessary purchases, such as overbuying when shopping for food on an empty stomach.

optimism and overconfidence: wearing rose-tinted glasses and having unrealistic expectations about the future can affect money management and leave you unprepared for a change in circumstance.

instant gratification: seeking instant gratification drives impulsive spending and can undermine long-term planning and savings.

harmful habits: automatic or mindless behaviour can amplify a poor financial decision as it becomes a recurring event.

social norms: we are heavily influenced by the actions of others; while this can be in certain circumstances, it also contributes to the pressure to keep up with the joneses through conspicuous consumption.

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