Question

Solve using math formulas and show explanation. If the appropriate discount rate for the following cash flows is 9.75% per year, what is the present value of the cash flows? What is the value of all the cash flows at year 2?

Year	Cash Flow
1	$2,800
2	0
3	8,100
4	1,940

Answer 1

To calculate the present value we will discount the cash flows at 9.75%

Present value = future value/(1 + discount rate)^n

= $2,800/1.0975 + $8,100/(1.0975)^3 + $1,940/(1.0975)^4

=$10,015.7459

To calculate the value of all the cash flows at year 2, we will discount year 3 and year 4 cash flow and find the future value after a year for the cash flow at year 1.

Value of all cash flows at year 2 = $2,800 x 1.0975 + $8,100/(1.0975) + $1,940/(1.0975)^2

=$12,064.0285

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