Final answer:
To calculate the present value of cash flows, divide each cash flow by (1 + discount rate) raised to the power of the number of periods in the future. The present value of the cash flows is the sum of the present values of each year.
Step-by-step explanation:
To calculate the present value of cash flows, we need to discount each cash flow back to the present using the discount rate. The present value of a cash flow is calculated by dividing the cash flow by (1 + discount rate) raised to the power of the number of periods in the future. Let's calculate the present value of the cash flows for each year:
- Year 1: 240 / (1 + 0.10) = $218.18
- Year 2: (240 + 3000) / (1 + 0.10)^2 = $2386.36
The present value of the cash flows is the sum of the present values of each year, which is $218.18 + $2386.36 = $2604.54.