Question

Assume a project will produce cash flows of $22,400, $28,700, $30,300, $10,900 at the end of Years 1 to 4, respectively. If the discount rate is 14.7 percent, what is the current value of these cash flows?

Answer 1

Here we will use the following formula:

PV = FV / (1 + r%)ⁿ

where, FV = Future value, PV = Present value, r = rate of interest = 14.7%, n= time period

For calculating the current or present value of the given cash flows, we will calculate the present values of all the years and add them up. Now,putting the values in the above equation, we get,

PV = $22400 / (1 + 14.7%)+ $28700 / (1 + 14.7%)² + $30300 / (1 + 14.7%)³ + $10900 / (1 + 14.7%)⁴

PV = $22400 / (1 + 0.147)+ $28700 / (1 + 0.147)² + $30300 / (1 + 0.147)³ + $10900 / (1 + 0.147)⁴

PV = $22400 / (1.147)+ $28700 / (1.147)² + $30300 / (1.147)³ + $10900 / (1.147)⁴

PV = $19529.2066+ ($28700 / 1.315609) + ($30300 / 1.50900) + ($10900 / 1.730827)

PV = $19529.2066 + $21814.99214 + $20079.52286 + $6297.5675

PV = $67721.2891

So, required current or present value is $67721.2891.