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The formula for discounting any specific period cash flow in period “t” is: 1 Cash flow...

The formula for discounting any specific period cash flow in period “t” is:

1 Cash flow from period “t” divided by (1+discount rate) raised exponentially to “t-1”

2 Cash flow from period “t” divided by the (discount rate) raised exponentially to “t”

3 Cash flow from period “t” divided by (1+discount rate) raised exponentially to “t”

4 Cash flow from period “t” divided by the (discount rate) raised exponentially to “t-1”

choose one of the 4 above

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Answer #1

Ans : Option 3 Cash flow from period “t” divided by (1+discount rate) raised exponentially to “t”

Present value of cash flow = Cash flow / (1+ discount rate)t

Example : Let us assume a cash flow of 10,000 at the end of two years and discount rate is 10%

Cash flow = $ 10,000

discount rate = 10%

t = 2

Present value = $ 10,000 / (1+10%)2

= $ 10,000 / (1.1)2

= $ 8264.46

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