Question

Suppose you will receive $2,000 two years from today (at the end of the second year) and $3,000 five years from today (at the end of the fifth year). What is the present value of this stream of cash flows when the interest rate is 6% per year (compounded annually)?

Answer 1

Answer:

$4,021.77

Explanation:

To solve this question find the present value of each cashflow then sum them up.

PV of 2,000 received at year 2;

Using a financial calculator, input the following;

FV = 2,000

I = 6%

N = 2

PMT = 0

then compute present value; CPT PV = $1,779.99

Next, PV of 3,000 received at year 5;

Using a financial calculator, input the following;

FV = 3,000

I = 6%

N = 5

PMT = 0

then compute present value; CPT PV = $2,241.78

Then sum up the two PVs = $1,779.99 +$2,241.78 = $4,021.77