Question

Consider the following case:The Purple Lion Beverage Company expects the following cash flows from its manufacturing plant in Palau over the next six years:Annual Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 $400,000 $37,500 $480,000 $450,000 $550,000 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? (Note: Do not round your intermediate calculations.) a. $1,775,000 b. $917,500 c. $1,682,726 d. $2,292,500"

Answer 1

Answer:

c. $1,682,726

Explanation:

The computation of the present value is shown below:

Year            Cash flow        Discount factor @4%              Present value  

1                 $400,000        0.961538462                             $384,615.38  

2                 $37,500          0.924556213                             $34,670.86        

3                 $480,000       0.888996359                            $426,718.25  

4                  $450,000       0.854804191                              $384,661.89  

5                  $550,000       0.821927107                              $452,059.91  

Total present value                                                              $1,682,726.29  

The discount factor is computed below:

= 1 ÷ (1 + rate)^years