Problem:
At the end of 2005, Uma Corporation was considering undertaking a major long-term project in an effort to remain competitive in its industry. The production and sales departments determined the potential annual cash flow savings that could accrue to he 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 2006 through 2011. The years 2012 through 2016 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 2012 through 20156 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 data is available to assist you:
| Uma Corp. |
| Present Value of Expected Future Savings |
| Period: 2006 through 2016 |
|
|
|
|
|
|
|
| Discount rate for years 2006 - 2011 |
7% |
|
|
| Discount rate for years 2012 - 2016 |
11% |
|
|
|
|
|
|
|
|
|
|
|
Annual |
|
|
Present |
|
| Year |
Period |
Savings |
PVIF |
PVIFA |
Value |
|
| 2006 |
1 |
$ 110,000 |
|
|
|
|
| 2007 |
2 |
120,000 |
|
|
|
|
| 2008 |
3 |
130,000 |
|
|
|
|
| 2009 |
4 |
150,000 |
|
|
|
|
| 2010 |
5 |
160,000 |
|
|
|
|
| 2011 |
6 |
150,000 |
|
|
|
|
| 2012 |
7 |
90,000 |
|
|
|
|
| 2013 |
8 |
90,000 |
|
|
|
|
| 2014 |
9 |
90,000 |
|
|
|
|
| 2015 |
10 |
90,000 |
|
|
|
|
| 2016 |
11 |
90,000 |
|
|
|
|
| |
|
$ 1,270,000 |
|
|
$ - |
|