Question

What is the present value of the following cash flow stream at a discount rate of 7%? $0 in year 0 $1,000 at the end of year 1 $2,500 at the end of year 2 $3,500 at the end of year 3 $4,250 at the end of year 4 $2,500 at the end of year 5

Answer 1

We can use the present value table to find out the required present value.

Present value of cash flows = $1000 * PVIF (7%,1 year) + $2500 * PVIF (7%, 2 years) + $3500 * PVIF (7%, 3 years) + $4250 * PVIF(7%, 4 years) + $2500 * PVIF(7%, 5 years)

Now, we will use the present value table to find out the values of PVIF (present value interest factor) @7% for different years.

Present value of cash flows = ($1000 * 0.935) + ($2500 * 0.873) + ($3500 * 0.816) + ($4250 * 0.763) + ($2500*0.713)

Present value of cash flows = $935 + $2182.5 + $2856 + $3242.75 + $1782.5

Present value of cash flows = $10998.75