Question

ام الا الرحمن الرحيم Question 4 PUMA® Men's Sports Apparel company has initiated a logo-licensing program. It expects to realize a revenue of S.R. 90.000 in fees next year from the sale of its logo. Fees are expected to increase uniformly to a level of S.R. 450,000 in 10 years. a- Construct the cash flow diagram. b- Determine the arithmetic gradient.

Answer 1

We can solve the sum of an Arithmetic Progression equation to calculate the annual increase in CF:

an = a1 + (n - 1)d

an = 450000 ai = 90000 n = 10

d = to the annual increase in previous year's CF to bring the final CF to 450000 in year 10

450000 = 90000 + (10 – 1)d

d = 40000

So the CF should increase by 40000 every year:

Year	CF
1	90000
2	90000+40000 = 130000
3	130000 +10000 = 170000
4	170000 + 40000 = 210000
5	210000 + 40000 = 250000
6	250000 + 40000 = 290000
7	290000 + 40000 = 330000
8	330000 + 40000 = 370000
9	370000 + 40000 = 410000
10	410000 + 40000 = 450000

CF Diagram is as follows:

500000 450000 450000 410000 400000 370000 350000 330000 290000 300000 250000 250000 210000 170000 200000 150000 130000 90000 100000 50000 1 2 3 4 5 6 7 8 9 10

Arithmetic gradient is equal to the annual increase of 40000