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SIZIF [17.4K]
3 years ago
9

The CFO of the company believes that an appropriate annual interest rate on this investment is 4%. What is the present value of

this uneven cash flow stream, rounded to the nearest whole dollar

Mathematics
1 answer:
hodyreva [135]3 years ago
6 0

Find attached the missing cash flow stream

Answer:

  • <u><em>Present value = $1,685,334 (rounded to the nearest whole)</em></u>

Explanation:

Since the <em>cash flow stream</em> is <em>uneven</em>, you must discount each stream individually and after you have discounted every stream you can add each preset value to find the net present value.

The formula for <em>present value</em> is:

               \text{Present Value} = \dfrac{\text{Future Value}}{(1+r)^n}\\\\\  Where:\\ \\ r = \text{Rate of return=interest rate}\\ \\ n = \text{Number of periods}

<u>1. Year 1:</u>

  • Future value = $250,000
  • r = 4%
  • n = 1

Present\text{ }value=\$250,000/(1+0.04)^1=\$240,384.62

<u>2. Year 2:</u>

  • Future value = $20,000
  • r = 4%
  • n = 2

Present\text{ }value=\$20,000/(1+0.04)^2=\$18,491.12

<u>3. Year 3:</u>

  • Future value = $330,000
  • r = 4%
  • n = 3

Present\text{ }value=\$330,000/(1+0.04)^3=\$293,368.80

<u>4. Year 4:</u>

  • Future value = $450,000
  • r = 4%
  • n = 4

Present\text{ }value=\$450,000/(1+0.04)^4=\$384,661.89

<u>5. Year 5:</u>

  • Future value = $550,000
  • r = 4%
  • n = 5

Present\text{ }value=\$550,000/(1+0.04)^5=\$452,059.91

<u>6. Year 6:</u>

  • Future value = $375,000
  • r = 4%
  • n = 6

Present\text{ }value=\$375,000/(1+0.04)^6=\$296,367.95

Total present value = $240,384.62 + $18,491.12 + $293,368.80 + $384,661.89 + $452,059.91 + $296,367.95 + $ 296,367.95

Total present value = $1,685,334.29 = $ 1,685,334

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