Question

Consider the following information:

PV: $15,000

CF1: $2,000

CF3: $4,000

CF4: $4,000

Discount rate 12% annually

What is the value of CF2? Include up to 2 decimals in your answer.

Answer 1

Present value is calculated as the discount value of the future cash flows.
Given that PV= $15,000
CF1= $2,000
CF2=?
CF3=$4,000
CF4=$4,000
Discounting rate =12%
The formula we will use to calculate the CF2 is given by:
Present value (PV)=CF1/(1+ discount rate)+CF2/(1+ discount rate)^2+CF3/(1+ discount rate)^3+CF4/(1+ discount rate)^4

Now, PV=$2,000/(1+12%)+CF2/(1+12%)^2+$4,000/(1+12%)^3+$4,000/(1+12%)^4

=>$15,000=$2,000/(1.12)^1+CF2/(1.12)^2+$4,000/(1.12)^3+$4,000/(1.12)^4
=>$15,000=$2,000/(1.12)+CF2/1.2544+$4,000/1.404928+$4,000/1.57351936
=>$15,000=$1785.714286+CF2/1.2544+$2847.120991+$2542.072314
=>$15,000=$1785.714286+$2847.120991+$2542.072314+CF2/1.2544
=>$15,000=$7174.907591+CF2/1.2544
=>$15,000-$7174.907591=CF2/1.2544
=>$7825.092409=CF2/1.2544
=>$7825.092409*1.2544=CF2
=>CF2=$9815.795918 or $9815.80 (rounded upto two decimal places)