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Hi,
Please can someone break down how they got 5.335? thank you
The present value of the machine will be the discounted value of the future cash flows that it is expected
to generate. If the machine is expected to generate $500,000 per annum for the remaining eight years of
its life and if the company’s cost of capital is 10%, present value will be calculated as:
$500,000 x 5.335* = $2667,500
* Cumulative present of $1 per annum for eight years discounted at 10%Hi,
Try not to worry too much about calculating the discount/annuity factor, as you will be given it in the exam.
The 5.335 is the total of the discount factors at 10% for each of the eight years. Remember that this is calculated by 1/(1+r)^n, so the first year is 1/1.1 = 0.909 and the second year is 1/1.1^2 = 0.826. If you do it for all of the 8 years and total them up then you should get the 5.335
Thanks
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