Your investment offers to pay you the following cashflows. a. If the discount ra
ID: 2662277 • Letter: Y
Question
Your investment offers to pay you the following cashflows. a. If the discount rate is 8 percent, what is the presentvalue of these cash flows? b. If the discount rate is 7 percent, what is the future valueof these cash flows? Year 1 2 3 4 5 Cashflows $500 $600 $700 $800 $900 Your investment offers to pay you the following cashflows. a. If the discount rate is 8 percent, what is the presentvalue of these cash flows? b. If the discount rate is 7 percent, what is the future valueof these cash flows? Year 1 2 3 4 5 Cashflows $500 $600 $700 $800 $900Explanation / Answer
Answer:
(a) If the discount rate is 8 percent, what is thepresent value of these cash flows?
Interest Rate = 8% or 0.08
Cash Flow 1 = $500 (At the end of year 1) time = 1year (from year 1 to 0)
Cash Flow 2 = $600 (At the end of year 2) time = 2years (from year 2 to 0)
Cash Flow 3 = $700 (At the end of year 3) time = 3years (from year 3 to 0)
Cash Flow 4 = $800 (At the end of year 4) time = 4years (from year 4 to 0)
Cash Flow 5 = $900 (At the end of year 5) time = 5years (from year 5 to 0)
PV 1 = Cash Flow 1 / (1+r)t
PV 1 = $500 / (1+0.08) 1
PV 1 = $500 / (1.08) 1
PV 1 = $500 / (1.08)
PV 1 = $462.9630
PV 2 = Cash Flow 2 / (1+r)t
PV 2 = $600 / (1+0.08) 2
PV 2 = $600 / (1.08) 2
PV 2 = $600 / (1.1664)
PV 2 = $514.4033
PV 3 = Cash Flow 3 / (1+r)t
PV 3 = $700 / (1+0.08) 3
PV 3 = $700 / (1.08) 3
PV 3 = $700 / (1.259712)
PV 3 = $555.6826
PV 4 = Cash Flow 4 / (1+r)t
PV 4 = $800 / (1+0.08) 4
PV 4 = $800 / (1.08) 4
PV 4 = $800 / (1.36048896)
PV 4 = $588.0239
PV 5 = Cash Flow 5 / (1+r)t
PV 5 = $900 / (1+0.08) 5
PV 5 = $900 / (1.08) 5
PV 5 = $900 / (1.4693280768)
PV 5 = $612.5249
Present Value of Cash Flows = PV 1 + PV 2+ PV 3 + PV 4 + PV 5
Present Value of Cash Flows = $462.9630 + 514.4033 + 555.6826 +588.0239 + 612.5249
Present Value of Cash Flows = $2733.5977 or$2733.60
(b) If the discount rate is 7 percent, what is thefuture value of these cash flows?
Interest Rate = 7% or 0.07
Cash Flow 1 = $500 (At the end of year 1) time = 4year (from year 1 to 5)
Cash Flow 2 = $600 (At the end of year 2) time = 3years (from year 2 to 5)
Cash Flow 3 = $700 (At the end of year 3) time = 2years (from year 3 to 5)
Cash Flow 4 = $800 (At the end of year 4) time = 1years (from year 4 to 5)
Cash Flow 5 = $900 (At the end of year 5) time = 0years (from year 5 to 5)
FV 1 = Cash Flow 1 * (1+r)t
FV 1 = $500 * (1+0.08) 4
FV 1 = $500 * (1.08) 4
FV 1 = $500 * (1.36048896)
FV 1 = $680.2445
FV 2 = Cash Flow 2 * (1+r)t
FV 2 = $600 * (1+0.08) 3
FV 2 = $600 * (1.08) 3
FV 2 = $600 * (1.259712)
FV 2 = $755.8272
FV 3 = Cash Flow 3 * (1+r)t
FV 3 = $700 * (1+0.08) 2
FV 3 = $700 * (1.08) 2
FV 3 = $700 * (1.1664)
FV 3 = $816.48
FV 4 = Cash Flow 4 / (1+r)t
FV 4 = $800 * (1+0.08) 1
FV 4 = $800 * (1.08) 1
FV 4 = $800 * (1.08)
FV 4 = $864
FV 5 = Cash Flow 5 / (1+r)t
FV 5 = $900 * (1+0.08) 0
FV 5 = $900 * (1.08) 0
FV 5 = $900 * (1)
FV 5 = $900
Future Value of Cash Flows = FV 1 + FV 2 +FV 3 + FV 4 + FV 5
Present Value of Cash Flows = $680.2445 + 755.8272 + 816.48 +864 + 900
Present Value of Cash Flows = $4016.5517 or$4016.55
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