Question

What is the present value of the following series of cash flows discounted at 12 percent:

$40,000 now;
$50,000 at the end of the first year;
$0 at the end of year the second year;
$60,000 at the end of the third year; and
$70,000 at the end of the fourth year

Answer 1

The present value of the following series of cash flows discounted at 12 percent is:

$171,890

Step-by-step explanation:

a) Data and Calculations:

Discount rate = 12%

$40,000 now;

$50,000 at the end of the first year;

$0 at the end of year the second year;

$60,000 at the end of the third year; and

$70,000 at the end of the fourth year

Future Value Discount Factor Present Value

$40,000 1 $40,000

$50,000 0.893 $44,650

$0 0.797 $0

$60,000 0.712 $42,720

$70,000 0.636 $44,520

Total present value $171,890

b) The present value is the discounted cash flow from series of future cash flows. The discount factor is applied to the individual cash flows, based on the number of years before the cash flow occurs.