Question

McCann Co. has identified an investment project with the following cash flows.
Year 1 Cash Flow:$950

Year 2 Cash Flow: 1,060

Year 3 Cash Flow: 1,270

Year 4 Cash Flow: 1,200


1) If the discount rate is 12 percent, what is the present value of these cash flows?

2) What is the present value at 18 percent?

3) What is the present value at 29 percent?

Answer 1

(a)-The Present Value of the cash flows if the discount rate is 12 percent.

Year	Annual cash flows ($)	Present Value Factor (PVF) at 12.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	950	0.892857	848.21
2	1,060	0.797194	845.03
3	1,270	0.711780	903.96
4	1,200	0.635518	762.62
TOTAL		3,359.82

“The Present value of the cash flows will be $3,359.82 “

(b)-The Present Value of the cash flows if the discount rate is 18 percent.

Year	Annual cash flows ($)	Present Value Factor (PVF) at 18.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	950	0.847458	805.08
2	1,060	0.718184	761.28
3	1,270	0.608631	772.96
4	1,200	0.515789	618.95
TOTAL		2,958.27

“The Present value of the cash flows will be $2,958.27“

(c)-The Present Value of the cash flows if the discount rate is 29 percent.

Year	Annual cash flows ($)	Present Value Factor (PVF) at 29.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	950	0.775194	736.43
2	1,060	0.600925	636.98
3	1,270	0.465834	591.61
4	1,200	0.361111	433.33
TOTAL		2,398.36

“The Present value of the cash flows will be $2,398.36“

NOTE

The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)n], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.