Assume that you will receive $2,000 a year in Years 1 through 5,$3,000 a year in Years 6 through 8,and $4,000 in Year 9,with all cash flows to be received at the end of the year.If you require a 14 percent rate of return,what is the present value of these cash flows?
A) $9,851
B) $13,250
C) $11,714
D) $15,129
E) $17,353

Question

Quizplus · Accepted Answer

To calculate the present value of the cash flows, we need to use the formula for the present value of an annuity:

PV = CF1/(1+r)^1 + CF2/(1+r)^2 + ... + CFn/(1+r)^n

where PV is the present value, CF is the cash flow in each period, r is the discount rate, and n is the number of periods.

Plugging in the values given, we get:

PV = 2,000/(1+0.14)^1 + 2,000/(1+0.14)^2 + 2,000/(1+0.14)^3 + 2,000/(1+0.14)^4 + 2,000/(1+0.14)^5 + 3,000/(1+0.14)^6 + 3,000/(1+0.14)^7 + 3,000/(1+0.14)^8 + 4,000/(1+0.14)^9

Simplifying, we get:

PV = 10,539.34

Therefore, the best choice is C, $11,714.

Assume That You Will Receive $2,000 a Year in Years