Final answer:
The present worth of the cash flow is the sum of each year's cash inflow discounted back to its present value using a discount rate of 10% per annum. Calculations must be done for each specified year and then aggregated to reveal the total present worth.
Step-by-step explanation:
To find the present worth of the cash flows from the real estate investment, we need to discount each cash flow back to its present value at a rate of 10% per year. By using the present value formula for each year's cash flow, we can sum them up to get the total present value of the investment cash flow. The formula for the present value (PV) of a single future cash flow is PV = FV / (1 + r)^n, where FV is the future value, r is the discount rate, and n is the number of periods until the payment is received.
To calculate the present value of each cash flow:
- Year 2: PV = $2,000 / (1 + 0.10)^2
- Year 3: PV = $3,000 / (1 + 0.10)^3
- Year 4: PV = $1,000 / (1 + 0.10)^4
- Year 5: PV = $5,000 / (1 + 0.10)^5
After calculating each year's present value, we add them up to obtain the total present worth. That sum is the present worth of the cash flow.