Question

Uppose there is an investment project with the following cash flows to be received at the end of next three years. If the interest rate is 8 percent: Year Cash Flow 1 $600 900 3 1,300

(a) What is the value of these cash flows at the end of Year 3?
(b) What is the value of these cash flows today (today is Year 0)?

Answer 1

The value of the cash flows at the end of Year 3 is $1,461.75, and the value of the cash flows today is $1,266.30.

Step-by-step explanation:

To calculate the present value of cash flows, we need to discount each cash flow by the interest rate.

(a) To find the value of these cash flows at the end of Year 3, we need to discount each cash flow by the interest rate for three years. Using the formula:

Value at Year 3 = Cash Flow / (1 + Interest Rate)Number of Years

Value at Year 3 = $600 / (1 + 8%)3 + $900 / (1 + 8%)2 + $1,300 / (1 + 8%) = $1,461.75

So, the value of these cash flows at the end of Year 3 is $1,461.75.

(b) To find the value of these cash flows today, we need to discount each cash flow by the interest rate for the respective number of years.

Value today = Cash Flow / (1 + Interest Rate)Number of Years

Value today = $600 / (1 + 8%)3 + $900 / (1 + 8%)2 + $1,300 / (1 + 8%) = $1,266.30

So, the value of these cash flows today is $1,266.30.