Question

what numbers were used to find the PV of all cash flows?

Answer 1

To find the PV of all cash flows, Present value factor is used. Present value factor is of 1. It denotes present value of $1 or value of cash flow of $1 in present terms.

P.V.F. formula = 1/(1+i)^n

Here i is interest rate and n is no. of years.

For e.g. Interest rate is 5%, P.V.F. of 1 @5% for 1 year shall be 1/(1+0.05)^1 = 0.952381

P.V.F. of 1 @ 5% for 2nd Year shall be 1/(1+0.05)^2 = 0.907029.

When this P.V.F. is multiplied with Cash flow amount. Present value of Cash flow is obtained.

For e.g. Cash flow of $200 is received in Year 1. So present value of $200 @ 5% shall be

200 * 0.952381 = $ 190.4762

It means $200 received in one year is equal to $190.4762 at present terms. Thus, P.V.F. is used to find out PV of all cash flows.