Question

Swanky Beverage Co. expects the following cash flows from its manufacturing plant in Palau over the next 5 years: Year Annual Cash Flows 1 $4,200,000 2 $4,550,000 3 $6,000,000 4 $4,800,000 5 $3,500,000 The CFO of the company believes that an appropriate annual interest rate on this investment is 7.5%. What is the present value of this uneven cash flow stream (rounded to the nearest whole dollar)?

Answer 1

Answer:

Total PV= $18,706,201.3

Explanation:

Giving the following information:

Year Annual Cash Flows:

1 $4,200,000

2 $4,550,000

3 $6,000,000

4 $4,800,000

5 $3,500,000

Discount rate= 7.5%

To calculate the present value, we need to use the following formula on each cash flow:

PV= FV/(1+i)^n

Cf1= 4,200,000/1.075= 3,906,976.74

Cf2 = 4,550,000/1.075^2= 3,937,263.39

Cf3= 6,000,000/1.075^3= 4,829,763.42

Cf4= 4,800,000/1.075^4= 3,594,242.54

Cf5= 3,500,000/1.075^5= 2,437,955.21

Total PV= $18,706,201.3