Question

What is the value of a loom that is expected to generate fixed annual cash flows of $3,640 every year for a certain amount of time if the first annual cash flow is expected in 5 years, the last annual cash flow is expected in 10 years, and the appropriate discount rate is 3.7 percent

Answer 1

PV= $13,627.44

Step-by-step explanation:

Giving the following information:

Cash flow= $3,640

Interest rate= 3.7%

First, we need to calculate the value of the investment five years from now:

PV= Cf*{(1/i) - 1/[i*(1 + i)^n]}

PV= 3,640*{(1/0.037) - 1 / [0.037*(1.037^5)]}

PV= $16,342.11

Now, the present value:

PV= FV / (1 + i)^n

PV= 16,342.11 / (1.037^5)

PV= $13,627.44