Question

# Assume a firm is evaluating a stream of cash flows. Today the firm incurs a cost...

Assume a firm is evaluating a stream of cash flows. Today the firm incurs a cost of \$10,000, and then the firm receives \$2,559 in year 1, \$2,881 in year 2, and \$2,782 in year 3. Assume the firm has a discount rate of 12%. Calculate the present value of cash flows form year 1 to year 3.

The question is solved by computing the net present value of the cash flows.

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -\$10,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the discount rate of 12%.
• Press the down arrow and CPT buttons to get the net present value.

Present value of cash flows at 12% discount rate is -\$3,438.29

In case of any query, kindly comment on the solution.

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