Question

Consider the following cash flows:

End of Quarter	1	2	3	4	5
Cash Flow	$1,700	$1,700	$1,500	$100	$1,700

If the effective annual rate is 17 percent, what is the present value of the cash flows?

Group of answer choices

$2,855.67

$7,368.50

$6,022.13

$4,460.17

Answer 1

Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows.

PV Formula and Calculation

Present Value= FV​ / (1+r)n

FV=Future Value

r=Rate of return

n=Number of periods​

We can also use discount factor table.

Here the Factor is 17%, and from the table we will get the vaue 0.855,0.731, 0.624, 0.534 and 0.456 for year 1 to 5.

year 1 = 1700*0.855= 1453.5

year 2 = 1700*.731= 1242.7

year3 = 1500* .624=936

year4 = 100*.534= 53.4

year 5 = 1700*456= 775.2

So the present value= 1453.5+1242.7+936+53.4+775.2= 4460.8

So the answer is $4460.17