Question

The following end of the year cash flows are given for Projects X .
Calculate the Present Value for Project X using a discount rate of 11%       
Year                1              2           3             4
Cash Flow    $600        $800      $700       $ 900

	$2,347.24
	$2,294.53
	$2,243.68
	$3483.26

Answer 1

Option (b) is correct

Here we will use the following formula:

PV = FV / (1 + r%)ⁿ

where, FV = Future value, PV = Present value, r = rate of interest = 11%, n= time period

For calculating the present value the given cash flows, we will calculate the present values of all the years and add them up. Now,putting the values in the above equation, we get,

PV = $600 / (1 + 11%)+ $800 / (1 + 11%)² + $700 / (1 + 11%)³ + $900 / (1 + 11%)⁴

PV = $600 / (1 + 0.11)+ $800 / (1 + 0.11)² + $700 / (1 + 0.11)³ + $900 / (1 + 0.11)⁴

PV = $600 / (1.11)+ $800 / (1.11)² + $700 / (1.11)³ + $900 / (1.11)⁴

PV = $540.540+ ($800 / 1.2321) + ($700 / 1.367631) + ($900 / 1.518070)

PV = $540.540 + $649.2979 + $511.8339 + $592.8580

PV = $2294.53

So, required present value is $2294.53.