Question

Moving Cash Flow. You are scheduled to receive a $460 cash flow in one year, a $760 cash flow in two years, and pay a $360 payment in three years. If interest rates are 11% per year, what is the combined present value of these cash flows?

a. $768.02 b. $1,220.00 c. $860.00 d. $1,294.48

Answer 1

Answer: Option a is correct.
The cash flows are:
Year 1: $460
Year 2: $760
Year 3:-$360
As the payment in year 3 is a cash outflow, we have taken it as negative.
Given that the interest rate=11% per year
Present value=Cash flow in year 1/(1+interest rate)^1+Cash flow in year 2/(1+interest rate)^2+Cash flow in year 3/(1+interest rate)^3
=$460/(1+11%)^1+$760/(1+11%)^2-$360/(1+11%)^3
=$460/(1.11)^1+$760/(1.11)^2-$360/(1.11)^3
=$460/1.11+$760/1.2321-$360/1.367631
=$414.4144144+$616.8330493-$263.2288973
=$768.0185664 or $768.02 (Rounded to two decimal places)