Question

You are considering a project which will provide annual cash inflows of $4,500, $5,700, and $8,000 at the end of each year for the next three years, respectively. What is the present value of these cash flows, given a 9% discount rate

Answer 1

To determine the present value of future cash inflows given a discount rate, calculate the present value for each cash flow separately and sum them together.

Step-by-step explanation:

To calculate the present value (PV) of future cash flows with a discount rate, we apply the formula PV = Cash Flow / (1 + r)^n, where 'r' is the discount rate, and 'n' is the number of periods until the payment. For the cash flow of $4,500 at the end of the first year, the present value is $4,500 / (1 + 0.09)^1. The second year's cash inflow of $5,700 has a present value of $5,700 / (1 + 0.09)^2. Lastly, we calculate the third year's cash inflow of $8,000 with a present value of $8,000 / (1 + 0.09)^3.

Summing these present values provides the total present value of all cash inflows. To get the final answer, calculate each present value:

• PV year 1 = $4,500 / (1 + 0.09)^1
• PV year 2 = $5,700 / (1 + 0.09)^2
• PV year 3 = $8,000 / (1 + 0.09)^3

Then add these values together to get the total present value.