Question

Carol Thomas will pay out $14,000 at the end of the year 2, $16,000 at the end of year 3, and receive $18,000 at the end of year 4. With an interest rate of 12 percent, what is the net value of the payments vs. receipts in today's dollars

Answer 1

The net value of the payments vs. receipts in today's dollars is ($11,102).

What is the present value?

The present value of future cash flows is the current value or the value in today's dollars.  It is computed by discounting the future values at the appropriate discount rate.

The present value can be computed using the Present Value formula, an online finance calculator, or the PV factor table.

Formula

PV=FV \frac{1}{(1+r)^{n}}

PV = present value

FV = future value

r = rate of return

{n} = number of periods

Data and Calculations:

Interest rate = 12%

Period     Cash flow     PV Factor     PV

Year 2     ($14,000)       0.797        -$11,158 ($14,000 x 0.797)

Year 3    ($16,000)        0.712        -$11,392 ($16,000 x 0.712)

Year 4     $18,000        0.636         $11,448 ($18,000 x 0.636)

Net present value of cash flows   -$11,102

Thus, the net value of the payments vs. receipts in today's dollars is ($11,102).

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