Question

Consider the following case:The Purple Lion Beverage Company expects the following cash flows from its manufacturing plant in Palau over the next six years:Annual Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 $400,000 $37,500 $480,000 $450,000 $550,000 The CFO of the company believes that an appropriate annual interest rate on this investment is 4%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar? (Note: Do not round your intermediate calculations.) a. $1,775,000 b. $917,500 c. $1,682,726 d. $2,292,500"

Answer 1

c. $1,682,726

Step-by-step explanation:

The computation of the present value is shown below:

Year Cash flow Discount factor @4% Present value

1 $400,000 0.961538462 $384,615.38

2 $37,500 0.924556213 $34,670.86

3 $480,000 0.888996359 $426,718.25

4 $450,000 0.854804191 $384,661.89

5 $550,000 0.821927107 $452,059.91

Total present value $1,682,726.29

The discount factor is computed below:

= 1 ÷ (1 + rate)^years