Question

Assume that your required rate of return is 12 percent and you are given the following stream of cash flows: Year Cash Flow 0 $10,000 1 15,000 2 15,000 3 15,000 4 15,000 5 20,000 If payments are made at the end of each period, what is the present value of the cash flow stream?

Answer 1

The present value of the cash flow stream is $66,908.79

Step-by-step explanation:

To compute the present value of the cash inflows, we have to multiply the present value factor with the yearly cash inflows

The discount factor should be computed by a formula which is shown below

= (1) ÷ (1 + rate) ÷ year

For year 0 = (1 ÷ 1.12) ^ 0 = 1

For year 1 = (1 ÷ 1.12) ^ 1 = 0.8929

For year 2 = (1 ÷ 1.12) ^ 2 = 0.7972

For year 3 = (1 ÷ 1.12) ^ 3 = 0.7118

For year 4 = (1 ÷ 1.12) ^ 4 = 0.6355

For year 5 = (1 ÷ 1.12) ^ 5 = 0.5674

Now, multiply this discount factor with yearly cash inflows

So, the value would be equal to

= ($10,000 × 1)+ ($15,000 × 0.8929) + ($15,000 × 0.7972) + ($15,000 × 0.7118) + ($15,000 × 0.6355) + ($20,000 × 0.5674)

= $10,000 + $13,392.86 + $11,957.91 + $10,676.70 + $9,532.77 + $11,348.54

= $66,908.79