Question

10 What is the Present Value of the following cash flows using a 10 % discount rate T1 = 50 T2 = 300 T3 = 87 T4 = 400

Answer 1

Present Value(PV) is the current value of a future sum of money or a stream of cash flows. It is calculated by discounting the cash flow(s) by the discount rate.

Formula,

PV = CF/(1+r)^t

We are given,

T1 = 50

T2 = 300

T3 = 87

T4 = 400

Discount rate = 10%

PV = 50/(1.1)^1 + 300/(1.1)^2 + 87/(1.1)^3 + 400/(1.1)^4

We can also calculate the PV on excel,

Yr	CF	Discounting factor	Present value of cash flows
1	50	0.90909	45.45
2	300	0.82645	247.93
3	87	0.75131	65.36
4	400	0.68301	273.21
		Sum	631.96

• Discounting factor = 1/(1+r)^t
• The present value of cash flow = Discounting factor * C

Hence the present value of cash flows is 631.96.

If you have any doubts please let me know in the comments. Please give a positive rating if the answer is helpful to you. Thanks.