Question

A publisher is deciding whether or not to invest in a new printer. The printer would cost $500, and it would increase cash flows by $600 for the next two years. What is the present value of the cash flows from the investment?

I know the answer is $1100 as my professor has already given me the answer, but I need to know the formula of how to get to $100

I was not provided with the interest rate

Answer 1

This can be the answer if we consider the rate of interest being 6%. At this rate the present value of cash flows will be 600 / (1 + 6%)^1 + 600 / (1 + 6%)^2 = 1100

Since only the present value of the cash flows from the investment is asked we consider only cash inflows. Otherwise if we consider both costs and revenues, so that now we spend 500 and we get 600 in year 1 and 2, the present value will be -500 + 1100 = 600. However, with no interest rate, all values are assumed in their present value terms and so PV of cash flow will be -500 + 600 + 600 = 700.