The CFO of the company believes that an appropriate annual interest rate on this investment is 9%. What is the present value of this

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The CFO of the company believes that an appropriate annual interest rate on this investment is 9%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar

Dr. Frankie Medhurst · Accepted Answer

$1,155,478Explanation:Present value is the sum of discounted cash flowsPresent value can be found using a financial calculator Cash flow in year 1 = $100,000Cash flow in year 2 =  $20,000 Cash flow in year 3 = $480,000 Cash flow in year 4 = $450,000 Cash flow in year 5 = $550,000 I = 9%Present value = $1,155,478To find the PV using a financial calculator:1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  3. Press compute

Dr. Frankie Medhurst · Answer

Present value of cash flows should be $1,307,822Explanation:We cannot use annuity formula for this problem because the amount of cash flows occurring in each year is different and we would need to find the present value of each cash flow separatelyThe present value of the cash flow can be computed using the following formulaPV = FV/(1+i)^nThe rate at which the cash flows are to be discounted is 9 percentFor the first  year the cash flow is $250,000 and we can compute the pressent value of the cash flow as under250,000/(1+0.09) = 250,000/1.09 = $229,357.80Foe the second year the cash flow is $37,500  37,500/(1+0.09)^2= 37,500/1.1881 = $31,563The present value of the cash flows for the subsequent years are provided as under480,000/(1+0.09)^3 = 480,000/1.295 = $370,648.07450,000/(1+0.09)^4 = 450,000/1.4116 = $318,791.34550,000/(1+0.09)^5 = 550,000/1.5386 = $357,462.26Adding up all the present values computed above, gives us the present value of cash flows229,357.8 + 31,563 + 370,648.07 + 318,791.34 + 357,462.26 = $1,307,822 approx

Dr. Frankie Medhurst · Answer

PV of the cash flow: $1,307,822Explanation:We will calculate the present value of a lump sum for each cash flow:   cashflow 250,000.00 time   1.00 rate  0.09   PV   229,357.80 cashflow 37,500.00 time   2.00   PV   31,563.00 cashflow 480,000.00 time   3.00 rate  0.09   PV   370,648.07 cashflow 450,000.00 time   4.00 rate  0.09   PV   318,791.34 cashflow 550,000.00 time   5.00 rate  0.09   PV   357,462.26 Then, we will add each present value:year 1:       229,357.7982year 2:         31,562.99975year 3:       370,648.0704year 4:         318,791.345year 5:        357,462.2625  total PV  1,307,822.476

Francesco Paucek

The CFO of the company believes that an appropriate annual interest rate on this investment is 9%. What is the present value of this

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