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28 November, 03:17

Income from a certain operation is expected to be zero in years one through five, after which it will be $50,000 per year forever. The capitalized cost of the income at 10% per year is nearest to:a. $252,300b. $282,250c. $310,450d. $500,000

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  1. 28 November, 04:48
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    c. $310,450

    Explanation:

    The computation of the capitalized cost of the income is shown below:

    = Present value of the annual cash flow * discount factor for 10 years at 5%

    where,

    Present value of the annual cash flow = $50,000 : 0.10 = $500,000

    And, the discount factor is

    = 1 : (1 + rate) ^ years

    = 1 : (1.10) ^5

    = 0.6209

    So, the capitalized cost of the income is

    = $500,000 * 0.6209

    = $310,450
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