Question

The appropriate discount rate for the following cash flows is 7.38 percent per year.

Answer 1

Answer:

Present value = $7107.76379 rounded off to $7107.76

Explanation:

The present value of cash flows can be calculated by discounting each of the cash flow back to today's value and summing them up. The present value of the cash flows can be calculated using the following formula,

Present Value = CF1 / (1+r)  +  CF2 / (1+r)^2  +  ....  +  CFn / (1+r)^n

Where,

• n is the total number of periods
• CF represents the cash flow in each year
• r is the discount rate

Present value = 2480 / (1+0.0738)  +  0  +  3920 / (1+0.0738)^3  +  

2170 / (1+0.0738)^4

Present value = $7107.76379 rounded off to $7107.76