Question

Question 21 You are trying to use your financial calculator to solve a present value problem that has unequal cash flows. You input monies you receive as positive values. Which one of the following statements is true? Any cash flow occurring today should be input as a Year 1 cash flow. A negative present value indicates that this series of cash flows causes you to lose money today given a certain discount rate. Because you are solving for the present value, any cash flow that occurs today can be ignored. Cash outflows should be input as positive values for each year in which they occur. You have annual cash flows starting with Year 1 of $100, $0, $200, and $300. The $300 cash flow should be input as occurring in year 3.

Answer 1

The present value of cash flows with a financial calculator requires cash flows occurring today to be input as Year 0. Negative present values indicate losses, and cash outflows should be entered as negative values, with the provided $300 cash flow occurring in Year 3.

Step-by-step explanation:

When solving a present value problem with unequal cash flows using a financial calculator, it is important to correctly input cash inflows and outflows to determine the present value accurately. The statement that any cash flow occurring today should be input as a Year 1 cash flow is incorrect; rather, any cash amount received today should be input as occurring in Year 0. This is because present value calculations are concerned with the value of money at the current point in time, which is considered Year 0.

A negative present value does imply that, given a specific discount rate, the series of cash flows would lead to a net loss today. Conversely, ignoring any cash flow that occurs today is incorrect as it would result in an inaccurate calculation of the present value. Cash outflows are input as negative values since they represent money being paid out, as opposed to inflows which are entered as positive values.

Lastly, for the provided cash flows starting with Year 1 of $100, $0, $200, and $300, the $300 cash flow should be input as occurring in Year 3 as cash flows are associated with the end of each period. Considering these factors and applying a proper discount rate, one can accurately calculate the present value of varied future cash flows.