Question

QUESTION :

The appropriate discount rate for the following cash flows is 10 percent compounded quarterly.
Year   Cash Flow
1   $700   
2   800   
3   0   
4   1,200   

What is the present value of the cash flows?

Answer 1

Present value of these cash flows is   $ 2,099.11

Step-1:Calculation of effective annual rate of interest
Effective annual rate of interest	=	((1+(i/n))^n)-1		Where,
	=	((1+(0.10/4))^4)-1		i	=	10%
	=	10.38%		n	=	4
Step-2:Calculation of present value of cash flows
Year	Cash flow	Discount factor	Present Value
a	b	c=1.1038^-a	d=b*c
1	$        700	0.905950645	$     634.17
2	800	0.820746571	$     656.60
3	0	0.743555885	0
4	1200	0.673624934	$     808.35
Total			$ 2,099.11
Note:
Discount rate is compounding quarterly and cash flows are given yearly.
So, we calculated effective annual rate to find correct discount rate to find present value of these cash flows.