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Homework answers / question archive / Income from the sale of application software (apps) is usually constant for several years and then decreases quite rapidly as the market gets close to saturation

Income from the sale of application software (apps) is usually constant for several years and then decreases quite rapidly as the market gets close to saturation

Economics

Income from the sale of application software (apps) is usually constant for several years and then decreases quite rapidly as the market gets close to saturation. Income from one smart phone app was $40,000 in years 1 through 5 and then decreased geometrically by 4% per year through year 7. Determine the equivalent annual income in years 1 through 7, using an interest rate of 8% per year.

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Interest rate = 8% per years

Income from year 1 was $40,000 through year 1 to 5 which decreases by 4 in year 6 and 7

Present value of cash flow: [Cash flow / (1 + Interest rate)^Year]

Year Income Present value of Income
1 $        40,000 $                          37,037.04
2 $        40,000 $                          34,293.55
3 $        40,000 $                          31,753.29
4 $        40,000 $                          29,401.19
5 $        40,000 $                          27,223.33
6 $        38,400 $                          24,198.51
7 $        36,864 $                          21,509.79
    $                        205,416.71

Present value of Income is $205,416.71

Annual equivalent income: Present value of Income / {[1 - (1 + r)^-n[ / r} = 205,416.71 / {[1 - (1 + 0.08)^-7[ / 0.08} = 39,454.88

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