Question

The present value of the following cash flow stream is $6,910 when discounted at 7 percent annually. Year Cash Flow 1 $1,250 2 ? 3 1,550 4 2,150 What is the value of the missing cash flow? Multiple Choice $1,960.00 $3,247.27 $3,182.32 $2,836.29 $3,312.21

Answer 1

ANS: Calculation of missing cash flow

Let the missing Cash Flow be X (Currency in Dollar)

Year	Cash Flows (A)	PVF@7% (B)	PV of Cash Flow (A*B)
1	1250	0.9345	1168.125
2	X	0.8734	0.8734X
3	1550	0.8162	1265.11
4	2150	0.7628	1640.02
	Total PV of Cash Flow	Given in Ques	6910

So, According to the equation,

Total of Discounted Cash Flow = Total PV of Cash Flow

or, 1168.125 + 0.8734X + 1265.11 + 1640.02 = 6910

or, 4073.255 + 0.8734X = 6910

or, 0.8734X = 6910 - 4073.255

or, 0.8734X = 2836.745

or, X = 2836.745 / 0.8734

or, X = 3247.93

So, Option (B) is Correct i.e $3247.27

Notes

1. The difference of $ 0.66 is due to Rounding off.

2. PVF means Present value of cash Flow for each Year.