Question

Wainright Co. has identified an investment project with the following cash flows. Year Cash Flow $ 720 1 2 930 1,190 1,275 4 If the discount rate is 10 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Present value What is the present value at 18 percent? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Present value What is the present value at 24 percent? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Present value Hints References eBook & Resources Hint #1 02/2 Type here to search

Answer 1

This question requires application of basic time value of money function, according to which FV = PV * (1 + r)" where FV is Future Value, PV is present value, n is number of periods and r is rate per period

Based on above,

$PV = \frac{FV}{(1 + r)^n}$

We need to apply this for all cash flows.

a) r = 10%

$PV = \frac{720}{(1 + 0.10)^1} + \frac{930}{(1 + 0.10)^2} + \frac{1190}{(1 + 0.10)^3} + \frac{1275}{(1 + 0.10)^4}$

PV = 654.55 + 768.60 + 894.06 + 870.84

PV = $3,188.05

b) r = 18%

$PV = \frac{720}{(1 + 0.18)^1} + \frac{930}{(1 + 0.18)^2} + \frac{1190}{(1 + 0.18)^3} + \frac{1275}{(1 + 0.18)^4}$

PV = 610.17 + 667.91 + 724.27 + 657.63

PV = $2,659.98

c) r = 24%

$PV = \frac{720}{(1 + 0.24)^1} + \frac{930}{(1 + 0.24)^2} + \frac{1190}{(1 + 0.24)^3} + \frac{1275}{(1 + 0.24)^4}$

PV = 580.65 + 604.84 + 624.14 + 539.29

PV = $2,348.92