Question

What is the present value the following set up cash flows at an interest rate of 7% $1000 today $2000 at the end of the year one $4000 at the end of the year three and $6000 at end of year five?

Answer 1

Answer:

Calculation of Present Value of Cashflows:

Present value of Cashflows = [CF₁ / 1 ] + [CF₂ / (1 + r)¹] + [CF₃ / (1 + r)³] + [CF₄ / (1 + r)⁵]

CF₁ = $1000

CF₂ = $2000

CF₃ = $4000

CF₄ = $6000

r = 7% or 0.07

Present value of cashflows = [$1000/ 1 ] + [$2000 / (1 + 0.07)¹] + [$4000 / (1 + 0.07)³] + [$6000 / (1 + 0.07)⁵]

= $1000 + $1869.16 + $3265.19 + $4277.92

=$10412.27

Therefore Present Value of cashflows today = $10412.27

Note: $1000 investment is at the start of year one therefore it is already at its present value and hence no need to discount it.