Question

Eulis Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows?

Answer 1

To calculate the present value of the cash flows, you need to discount each cash flow to its present value using the discount rate of 10%.

Step-by-step explanation:

To calculate the present value of the cash flows, you need to discount each cash flow to its present value using the discount rate of 10%. The present value of a cash flow is calculated by dividing the cash flow by (1 + discount rate)^n, where n is the number of periods from the present. Here is the step-by-step calculation:

1. Identify the cash flows.
2. Calculate the present value of each cash flow using the formula: Present Value = Cash Flow / (1 + Discount Rate)^n.
3. Add up all the present values to get the total present value of the cash flows.

For example, if the cash flows are $100, $200, and $300 over three periods, the present value of each cash flow would be:

• Period 1: $100 / (1 + 10%)^1 = $90.91
• Period 2: $200 / (1 + 10%)^2 = $165.29
• Period 3: $300 / (1 + 10%)^3 = $225.08

Adding up all the present values gives:

Total Present Value = $90.91 + $165.29 + $225.08 = $481.28

Therefore, the present value of the cash flows is $481.28.