Question

11. Consider the following cash flows:                                  Time Period &nb

11. Consider the following cash flows:

                                 Time Period

                           Expected Cash Flows

1

$100

2

$400

3

$500

4

??CF??

5

$800

Total Present Value (at a 10% discount rate)= $1,771.99

Note that the present value of all five cash flows (including the “unknown” cash flow at the end of year 4) is $1,771.99. What is the value of the “unknown” cash flow at period 4? (Worth 2 points)

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Answer #1

Answer)   Cash flow for fourth year = 700

Total present value = PV 0f 1st year + PV 0f 2nd year + PV 0f 3rd year + PV 0f 4th year + PV 0f 5th year

1771.99 = 90.909 + 330.579 + 375.657 + PV 0f 4th year + 496.737

PV 0f 4th year = 1771.99 – (90.909 + 330.579 + 375.657 + 496.737)

PV 0f 4th year = 1771.99 - 1293.882

Present value of 4th year @ 10% = 478.108

Cash flow for fourth year = Present value of 4th year/pvf of fourth year at 10%

Cash flow for fourth year = 478.108/0.6830

Cash flow for fourth year = 700

table showing calculation of present value factor and present value of cash inflow

year cash inflow pvf @ 10% present value of cash inflow
1 100 0.9091 90.909
2 400 0.8264 330.579
3 500 0.7513 375.657
4 700 0.6830 478.109
5 800 0.6209 496.737
Total present value 1771.99
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