Huggins Co. has identified an investment project with the following cash flows.
ID: 2613649 • Letter: H
Question
Huggins Co. has identified an investment project with the following cash flows.
If the discount rate is 11 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
What is the present value at 20 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
What is the present value at 30 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Year Cash Flow 1 $ 910 2 1,310 3 1,570 4 1,750
Explanation / Answer
PV = FV/(1+i)n
where,
PV = Present Value
FV = Future Value
i = Discount Rate(in decimal form)
n = Number of Periods
Applying the above formulae in given problem,
Discount Rate = 11% or .11
Present Value of cash flow of year 1
=910/ (1.11)1
=819.80
Present Value of cash flow of year 2
=1310/ (1.11)2
=1063.21
Present Value of cash flow of year 3
=1570/ (1.11)3
=1148
Present Value of Cash flow of year 4
=1750/ (1.11)4
= 1152.78
Total Present Value = 819.80 + 1063.21 + 1148 + 1152.78 = $ 4183.79
OR
It can be presented as:
PV= [910/ (1.11)1] + [1310/ (1.11)2] + [1570/ (1.11)3] + [1750/ (1.11)4]
= $ 4183.79
Similarly, for discount rate of 20% and 30%.
PV= [910/ (1.20)1] + [1310/ (1.20)2] + [1570/ (1.20)3] + [1750/ (1.20)4]
= $ 3420.56
PV= [910/ (1.30)1] + [1310/ (1.30)2] + [1570/ (1.30)3] + [1750/ (1.30)4]
= $ 2802.48
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