Question

For an interest rate of 10% compounded annually, evaluate the value of “X” from the cash flows given in table below.

Year	0	1	2	3	4	5
Cash Flows	-10000+x	1600	1700	1800	1900	3500

If someone could explain how to solve this problem I would appreciate it, as I am struggling in this class. Thank you

Answer 1

First, we compute Present value (PV) of known cash flows, as follows.

PV = 1600 x P/F(10%, 1) + 1700 x P/F(10%, 2) + 1800 x P/F(10%, 3) + 1900 x P/F(10%, 4) + 3500 x P/F(10%, 5)

= 1600 x 0.9091** + 1700 x 0.8264** + 1800 x 0.7513** + 1900 x 0.683** + 3500 x 0.6209**

= 1454.56 + 1404.88 + 1352.34 + 1297.7 + 2173.15

= 7682.63

Since PV of cash flows is equal to cash flow in year 0, we have

- 10000 + X = 7682.63

X = 10000 + 7682.63 = 17682.63

**From P/F Factor table