Answer:
The sum of the present values of the stream of cash flows is $1,011,772.58
Explanation:
We need to compute the present value of the cash flows separately for each amount
The first cash flow is occurring at the end of the first year
We use the formula PV = FV/(1+i)^n
Where PV = Present Value, FV = Future value, i = Interest rate, which is the rate at which the cash flows are to be discounted and n = the year in which the cash flow occurs
Plugging the values in the formula, we get the present value for the first year
PV = 250,000/(1+0.065)^1 = 250,000/1.065 = 93,896.71= $93,896.71
The present values for the successive years are provided as under
PV = 20,000/(1+0.065)^2 = 20,000/(1.065)2 = 17,633.1857= $17,633.1857
PV = 180,000/(1+0.065)^3 =180,000/(1.065)3 = 149,012.8365= $149,013.8365
PV = 450,000/(1+0.065)^4 =450,000/(1.065)4 = 349,795.3909= $349,795.3909
PV = 550,000/(1+0.065)^5 =550,000/(1.065)5 = 401,434.4601= $401,434.4601
Adding up the present values for each of the years, we obtain the present value of the cash flow stream
93,896.71+17,633.1857+149,013.8365+349,795.3909+401,434.4601 = $1,011,773,.58 approximately (only the final answer is rounded off to two decimal points)
The solution in word format is also attached here
