Question

Some of the following future cash flows have been expressed in then-current (future) dollars and others in CV dollars. Use an interest rate of 12% per year and an inflation rate of 6% per year. Find the present worth with all cash flows expressed in future dollars.

Year | Cash flow, $ | Expressed as |

0 | 15,700 | CV |

3 | 49,500 | Then-current |

4 | 14,300 | Then-current |

7 | 25,700 | CV |

Answer #1

In future dollars

CV of 7th year CF = 25700*(1+3%)7 = 31607.76

Present worth = 15700 + 36500 / (1+12%)3 ?+ 11700 / (1+12%)4 ?+ 31607.76? / (1+12%)7 ?=63413.29

In todays dollars

CV of 3rd year CF = 36500/(1+3%)3 = 33402.67

CV of 4th year CF = 11700/(1+3%)4 = 10395.30

Present worth of year 0 CF = 15700

Present worth of year 3 CF = 33402.67? / (1+12%)3 = 23775.36

Present worth of year 4 CF = 10395.30? / (1+12%)4 = 6606.40

Present worth of year 7 CF = 25700? / (1+12%)7 = 11625.37

Present worth = 57707.14

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