Question

A project is expected to produce cash flows of $12,800, $15,900, and $18,000 over the next 3 years, respectively. After 3 years, the project will be discontinued. What is this project worth today at a discount rate of 12.5 percent?

Select one:

A. $36,808.17
B. $35,758.00
C. $34,435.74
D. $35,201.76
E. $36,582.72

Answer 1

The correct answer is Option (E).

Step-by-step explanation:

According to the scenario, the given data are as follows:

FV of 1st year = $12,800

FV of 2nd year = $15,900

FV of 3rd year = $18,000

Discount rate = 12.5%

So, we can calculate the present value by using following formula:

PV = FV × (1 ÷ (1+r)^t

So, by putting the value we get

PV =$12,800 × 1 ÷ (1 + 0.125)^1 + $15,900 × 1 ÷ (1 + 0.125)^2 + $18,000 × 1 ÷ (1 + 0.125)^3

PV =$12,800 × 1 ÷ (1.125)^1 + $15,900 × 1 ÷ (1.125)^2 + $18,000 × 1 ÷ (1.125)^3

PV = $36,582.72