Question

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

Answer 1

Find attached the missing cash flow stream

Answer:

• Present value = $1,685,334 (rounded to the nearest whole)

Explanation:

Since the cash flow stream is uneven, 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 present value is:

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

1. Year 1:

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

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

2. Year 2:

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

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

3. Year 3:

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

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

4. Year 4:

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

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

5. Year 5:

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

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

6. Year 6:

• 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