Final answer:
The question concerns computing the present discounted value of future cash flows using a specified interest rate. The payment series includes immediate and future payouts, and the present value calculation involves discounting each future amount back to its present worth. The total present value is the sum of the discounted values for each period.
Step-by-step explanation:
The student's question is related to the calculation of the present discounted value of future cash flows. To calculate the present value of each cash flow, we use the formula Present discounted value = Future value / (1 + Interest rate)numbers of years t. When given a series of future payments from a firm, which are $15 million now, $20 million in one year, and $25 million in two years, we assume a certain interest rate to discount these future payments back to their present value. We also plot these amounts in a chart and connect them with lines showing the progression over time.
To compute the present discounted value of each payment, you would first add 1 to the interest rate, elevate this to the power of the number of years (t), and then divide the future payment by this calculated amount. To find the total present value of all cash flows, add up all the individual present values calculated for each time period.
For example, if the interest rate is 15%, the present value of $20 million received in one year would be calculated as $20 million / (1 + 0.15)1 and so on for the other amounts and years. Notice that the formula helps determine what the future amounts are worth today given the cost of capital or interest rate.