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3 years ago

The following is the cash flow from a manufacturing plant in the next five years:

Business

1 answer:

Svetllana [295]3 years ago

6 0

Answer:

The sum of the present values of the stream of cash flows is $1,011,772.58

Explanation:

We need to compute the present value of the cash flows separately for each amount

The first cash flow is occurring at the end of the first year

We use the formula PV = FV/(1+i)^n

Where PV = Present Value, FV = Future value, i = Interest rate, which is the rate at which the cash flows are to be discounted and n = the year in which the cash flow occurs

Plugging the values in the formula, we get the present value for the first year

PV = 250,000/(1+0.065)^1 = 250,000/1.065 = 93,896.71= $93,896.71

The present values for the successive years are provided as under

PV = 20,000/(1+0.065)^2 = 20,000/(1.065)2 = 17,633.1857= $17,633.1857

PV = 180,000/(1+0.065)^3 =180,000/(1.065)3 = 149,012.8365= $149,013.8365

PV = 450,000/(1+0.065)^4 =450,000/(1.065)4 = 349,795.3909= $349,795.3909

PV = 550,000/(1+0.065)^5 =550,000/(1.065)5 = 401,434.4601= $401,434.4601

Adding up the present values for each of the years, we obtain the present value of the cash flow stream

93,896.71+17,633.1857+149,013.8365+349,795.3909+401,434.4601 = $1,011,773,.58 approximately (only the final answer is rounded off to two decimal points)

The solution in word format is also attached here

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