Question

Suppose we have three future cash flows, $2,000 a year from now, $1,400 three years from now and $1,700 five years from now. The annual interest rate is 12%. What is present value of these multiple uneven future cash flows?

Answer 1

To calculate the present value of uneven future cash flows, we need to discount each cash flow back to the present using the given interest rate. The formula for calculating the present value is:

PV = CF1 / (1 + r)^1 + CF2 / (1 + r)^2 + CF3 / (1 + r)^3 + ...

Where PV is the present value, CF1, CF2, CF3, etc. are the cash flows at different periods, and r is the interest rate.

In this case, we have:

CF1 = $2,000 (one year from now)

CF2 = $1,400 (three years from now)

CF3 = $1,700 (five years from now)

r = 12% = 0.12

Calculating the present value:

PV = $2,000 / (1 + 0.12)^1 + $1,400 / (1 + 0.12)^3 + $1,700 / (1 + 0.12)^5

PV = $1,785.71 + $1,113.74 + $1,110.29

PV ≈ $4,009.74

Therefore, the present value of these multiple uneven future cash flows, given an annual interest rate of 12%, is approximately $4,009.74.