Question

Dynamics Telecommunications Corp. has made an investment in another company that will guarantee it a cash flow of $21,300 each year for the next five years. If the company uses a discount rate of 15 percent on its investments, what is the present value of this investment? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25.) Present value of investment $

Answer 1

We have to find the present value discount factors and then multiply with the cashflow to find the discounted cashflows. Then add all the 5 years discounted cashflows to arrive at present value of the investment

Year1 present value discount factor=1/(1+15%) and Year2 present value discount factor=1/((1+15%)^2),  Year3=1/((1+15%)^3) and goes on like that. Then multiply with the cashflows of the respective year to find the discounted cashflows.

	Cashflows	Present value discount factor@15%	Discounted cashflows
Year1	21300	0.869565217	18521.74
Year2	21300	0.756143667	16105.86
Year3	21300	0.657516232	14005.10
Year4	21300	0.571753246	12178.34
Year5	21300	0.497176735	10589.86
			71400.90

Add all the discounted cashflows to get the present value of the investment=$71,400.90