will receive $200 payment at the end of 11 year to 20th year
salveage value is $1000
12% interest rate.
What's the present value? Please explain why "end of year" matters
present value = sum of present values of cash flows
present value of each cash flow = cash flow / (1 + interest rate)n, where n = number of years after which the cash flow occurs
Cash flow at end of years 11 to 19 = $200
Cash flow at end of year 20 = $200 + $1000 = $1200
present value = $467.51
End of year matters because if the payment is received at the end of the year, the payment is discounted for that year as well. However, if the payment is received at the beginning of the year, it is not discounted for that year because it is equivalent to receiving the payment at the end of the previous year. Thus, the present value is higher if the payment is received at the beginning of the year, and lower if the payment is received at the end of the year.
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