Answer:
The present value is
$19,039
Explanation:
The computation of the Present value is shown below
= Present value of all yearly cash inflows after applying discount factor
The discount factor should be computed by
= 1 ÷ (1 + rate) ^ years
where,
rate is 2%
Year = 0,1,2,3,4 and so on
Discount Factor:
For Year 1 = 1 ÷ 1.02^1 = 0.9804
For Year 2 = 1 ÷ 1.02^2 = 0.9612
For Year 3 = 1 ÷ 1.02^3 = 0.9423
For Year 4 = 1 ÷ 1.02^4 = 0.9238
So, the calculation of a Present value of all yearly cash inflows are shown below
= (Year 1 cash inflow × Present Factor of Year 1) + (Year 2 cash inflow × Present Factor of Year 2) + (Year 3 cash inflow × Present Factor of Year 3) + (Year 4 cash inflow × Present Factor of Year 4)
= ($5,000 × 0.9804) + ($5,000 × 0.9612) + ($5,000 × 0.9423) + ($5,000 × 0.9238)
= $4,901.96 + $4,805.84 + $4,711.61 + $4,619.23
= $19,039
We take the first four digits of the discount factor.
