Final answer:
To calculate the present value of John Houston's cash flow from the investment, discount each annual payment by the opportunity cost of 8% over 14 years using the formula PV = FV / (1 + r)^t, where PV is the present value, FV is the future value, r is the discount rate, and t is the time period.
Step-by-step explanation:
The student is asking about calculating the present value of a series of future cash flows that John Houston will receive from a fund. To find the present value, we need to discount each of the annual payments of $8.633 by John's opportunity cost of 8% over 14 years. The present value of a future cash flow can be determined using the present value formula PV = FV / (1 + r)^t, where PV is the present value, FV is the future value, r is the discount rate (opportunity cost), and t is the number of years.To calculate the total present value of the entire cash flow stream, we will sum the present values of the cash flows for each of the 14 years.Here is the formula applied to the first cash flow: PV = 8.633 / (1 + 0.08)^1. This calculation would be repeated for each subsequent year up to the 14th year, adjusting the exponent (t) to represent the year number, and then sum all the calculated present values to find the total present value of the cash flow stream.