Answer:
Present values @ 11%
Years Present Value
1 $775
2 $982
3 $1075
4 $1070
Present values @ 16%
Years Present Value
1 $741
2 $899
3 $942
4 $897
c.
Present values @ 30%
Years Present Value
1 $662
2 $716
3 $669
4 $569
Explanation:
Cash flows that will be received in future do not have same value as today, because if received today there is an opportunity to reinvest it and get some return. For this reason we calculate the present value of future cash flow.
Discounting method is used to calculate the present values. using following formula of discounting we calculate the PV.
PV = FV / ( 1 + r )^n
a.
Present values @ 11%
Years Cash Flows Discounting Present Value
1 $860 860 x ( 1 + 11%)^-1 $775
2 $1,210 1,210 x ( 1 + 11%)^-2 $982
3 $1,470 1,470 x ( 1 + 11%)^-3 $1075
4 $1,625 1,625 x ( 1 + 11%)^-4 $1070
b.
Present values @ 16%
Years Cash Flows Discounting Present Value
1 $860 860 x ( 1 + 16%)^-1 $741
2 $1,210 1,210 x ( 1 + 16%)^-2 $899
3 $1,470 1,470 x ( 1 + 16%)^-3 $942
4 $1,625 1,625 x ( 1 + 16%)^-4 $897
c.
Present values @ 30%
Years Cash Flows Discounting Present Value
1 $860 860 x ( 1 + 30%)^-1 $662
2 $1,210 1,210 x ( 1 + 30%)^-2 $716
3 $1,470 1,470 x ( 1 + 30%)^-3 $669
4 $1,625 1,625 x ( 1 + 30%)^-4 $569
As the discount rate increase the Present value of the cash flows decreases because of discounting factor.
