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Company A sells machinery to Company B. Company B agrees to pay Company A $250,000 at...

Company A sells machinery to Company B. Company B agrees to pay Company A $250,000 at the end of each of the next 5 years, with discount rate 4%. Instruction: [1] provide a clear calculation to determine the first year of Present value of cash flow [2] provide a clear calculation for each year cash payment reduction for each year of 5 years. [3] please provide an explanation towards your calculation.

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Answer #1

1: First year of present value of cash flow = 250000/ 1.04^1 =

240384.62

2: Year 1 Cash flow = 24038.46

Year 2 CF = 250000/1.04^2 =231139.05

Year 3 CF = 250000/1.04^3=222249.09

Year 4 CF = 250000/1.04^4=213701.05

Year 5 CF = 250000/1.04^5= 205481.78

3: the annual cash flow is the present value of future cash flows. This is calculated by discounting the future cash flows at a particular rate of interest. This rate of interest is the opportunity cost of those funds.

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