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You have been offered the opportunity to invest in a project that will pay $3,327 per...

You have been offered the opportunity to invest in a project that will pay $3,327 per year at the end of years one through three and $13,365 per year at the end of years four and five. If the appropriate discount rate is 18.6 percent per year, what is the present value of this cash flow pattern?

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Answer #1

Present value of cash flows from year 1 to 3 = Annuity * [ 1 - 1 / ( 1 + r)n ]] / r

Present value of cash flows from year 1 to 3 = 3,327 * [ 1 - 1 / ( 1 + 0.186)3]] / 0.186

Present value of cash flows from year 1 to 3 = 3,327 * 2.15347

Present value of cash flows from year 1 to 3 = 7,164.85

Present value of year 4 cash flow = 13,365 / ( 1 + 0.186)4

Present value of year 4 cash flow = 6,755.075

Present value of year 5 cash flow = 13,365 / ( 1 + 0.186)5

Present value of year 5 cash flow = 5,695.68

Present value = 5,695.68 + 6,755.075 + 7,164.85

Present value = $19,615.605

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