Question

. Assuming a discount rate of 14%, calculate the PV of a cash flow stream that pays $500 in one year and $1,000 in 5 years.

Answer 1

Here we will use the following formula:

PV = FV / (1 + r%)ⁿ

where, FV = Future value, PV = Present value, r = rate of interest = 14%, n= time period

For calculating the present value the given cash flows, we will calculate the present values of both the cash inflows and add them up. Now,putting the values in the above equation, we get,

PV = $500 / (1 + 14%)+ $1000 / (1 + 14%)⁵

PV = $500 / (1 + 0.14)+ $1000 / (1 + 0.14)⁵

PV = $500 / (1.14)+ $1000 / (1.14)⁵

PV = $438.59649+ ($1000 / 1.9254145824)

PV = $438.59649 + $519.36866

PV = $957.9651

So, required present value is $957.9651.