Final answer:
The present value of an investment with annual cash flows over a set number of years at a given discount rate is determined by summing the present values of each individual cash flow, discounted back to the present using the formula PV = FV / ((1 + r)^n).
Step-by-step explanation:
To calculate the present value of an investment that provides a series of future cash flows, one must apply the formula for present discounted value (PDV). In the case of Cullumber Telecommunications Corp., an investment that guarantees a cash flow of $20,500 each year for the next five years at a 17% discount rate needs to be evaluated. The present value of each individual cash flow is found by dividing the annual cash flow by the sum of one plus the discount rate to the power of the number of years into the future the cash flow is received.
The formula for the present value of each cash flow is given by:
Present Value = Future Cash Flow / ((1 + Discount Rate)^Number of Years)
To find the total present value of the investment, we sum up the present values of each year's cash flow. This approach takes into consideration the time value of money, offering a clearer picture of what the future cash flows are worth in today's dollars. The final present value of the investment is the sum of the present values calculated for each of the five years.