Question

g You will be receiving cash flows of: $2,000 today, $3,000 at end of year 1, $5,000 at end of year 3, and $7,000 at end of year 5. What is the present value of these cash flows at an interest rate of 10%?

Answer 1

Answer:

$12 830.29

Explanation:

The future cash flows are discounted at the  interest rate to get present value

Year 0 =$2000

Year 1 = $3000

Year 3 = $5000

Year 5 = $7000

r = 10%

PV of cash flows = 2000+3000/(1.1)^1+5000/(1.1)^3+7000/(1.1)^5

                             =2000+2727.27+3756.57+4346.45

                              =$12830.29

     

Answer 2

Answer:

The present value of the cashflows will be $12830.30

Explanation:

The present value of the cashflows can be calculated by dividing the cash flows by the appropriate discount rate and for the appropriate time period.

The present value of the given cash flows will be,

Present Value = CF1 / (1+r) + CF2 / (1+r)^2 + .... + CFn / (1+r)^n

As the first payment is received today, it will already be in the present value so it will not be discounted.

Present value = 2000 + 3000 /  (1+0.1) + 5000 / (1+0.1)^3 + 7000 / (1+0.1)^5

Present value = $12830.295 rounded off to $12830.30