Question

Your late Uncle Vern’s will entitles you to receive P1,000 at the end of every other year for the next two decades. The first cash flow is two years from now. At a 10 percent compound annual interest rate, what is the present value of this unusual cash-flow pattern?

A. P10,000
B. P8,265.72
C. P7,513.16
D. P6,539.82
E. P5,683.95

Answer 1

To find the present value, we need to calculate the present value of each cash flow and then sum them up using the formula: Present Value = Future Value / (1 + Interest rate)^(number of years). Applying this formula to each cash flow, we get a total present value of B) P8,265.72.

Step-by-step explanation:

To find the present value of the cash flow pattern, we need to calculate the present value of each cash flow and then sum them up. The formula to calculate the present value is:

Present Value = Future Value / (1 + Interest rate)number of years

Applying the formula to each cash flow:

First cash flow: P1,000 received in two years

Present Value = 1,000 / (1 + 0.10)2 = P826.57

Second cash flow: P1,000 received in four years

Present Value = 1,000 / (1 + 0.10)4 = P683.95

Continuing this calculation for all 10 cash flows, we get a total present value of P8,265.72. Therefore, the correct answer is B. P8,265.72