Answer:
Today's value of all the cash flow=$1,702.793
Explanation:
Today's cash flows is the same as the present value of cash flows. To determine the present value of cash flows one needs to determine the value of the cash flow at a specific point in time, then use the interest rate to convert it into a present value. This can be done using the formula below;
<em>Step 1: Formula for present value of future cash flows</em>
P.V=F.V/(1+r)^n
where;
P.V=present value of future cash flows
F.V=future value of cash flows
r=rate of interest
n=number of years
In our case;
P.V=unknown, to be determined
F.V=-2,000
r=6%=6/100=0.06
n=3 years
replacing;
P.V=-2,000{(1+0.06)^3}=-$1,679.239
<em>Step 2: Formula for present value of past cash flows</em>
P.V=p.v{(1+r)^n}
where;
P.V=Present value of past cash flows=unknown
p.v=Past value of cash flows=$2,000
r=rate of interest=0.06
n=number of years=3 years
replacing;
P.V=2,000{(1+0.06)^3}=2,000(1.06^3)=$2,382.032
<em>Step 3: Determine present cash flows</em>
Present cash flows=$1,000 now
<em>Step 4: Determine total present value of all the cash flows</em>
Total present value=present value of future cash flows+present value of past cash flows+cash flows now
where;
Total present value=unknown, to be determined
present value of future cash flows=-$1,679.239
present value of past cash flows=$2,382.032
cash flows now=$1,000
replacing;
Total present value=-1,679.239+2,382.032+1,000=$1,702.793
Today's value of all the cash flow=$1,702.793
