Question

Rainbow bought a new home entertainment system today from Andre’s Electronics. She will receive a cash rebate of $230 from Andre’s Electronics today, pay $720 to Andre’s Electronics in 1 year, receive a cash rebate of $1,640 from Andre’s Electronics in 2 years, and pay $4,980 to Andre’s Electronics in 4 years. If the discount rate is 18.94 percent, then what is the present value of the cash flows associated with this transaction?

Answer 1

-$1,704.45

Step-by-step explanation:

The computation of the present value is shown below:

Year Cash inflows Discount factor Present value

@18.94%

0 $230.00 1 $230.00

1 -$720.00 0.8407600471 -$605.35

2 $1,640.00 0.7068774568 $1,159.28

3 $0.00 0.5943143238 $0.00

4 -$4,980.00 0.4996757389 -$2,488.39

Total present value is -$1,704.45

The discount factor is computed below:

= 1 ÷ (1 + rate)^years