Question

What is the present value of the following set of cash flows if the discount rate is 11.5

Answer 1

The present value of the cash flows is calculated using the discount rate of 11.5%.

Step-by-step explanation:

To determine the present value of a set of cash flows, we utilize the discounted cash flow (DCF) method. Each future cash flow is discounted back to its present value by dividing it by (1 + discount rate) raised to the power of the respective period. The formula for present value (PV) is:

`\[PV = (CF_1)/((1+r)^1) + (CF_2)/((1+r)^2) + \ldots + (CF_n)/((1+r)^n),\]`

where
`\(CF_1, CF_2, \ldots, CF_n\)` are the cash flows in each period, and (r) is the discount rate.

This calculation is vital because it accounts for the time value of money, reflecting the principle that a sum of money today is worth more than the same sum will be in the future. The discount rate of 11.5% is applied to reflect the opportunity cost of investing in the given cash flows compared to alternative investments.