Consider the following cash flows:
Date Cash Received Amount of Cash
1/1/15 $100
1/1/16 $100
1/1/17 $500
1/1/18 $100
What is the value on 1/1/14 of the above cash flows? Use an 8% discount rate,and round your answer to the nearest $1.00.
A)$649
B)$601
C)$740
D)$800

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of the cash flows is $649.00. The present value of a cash flow is the value of the cash flow today, taking into account the time value of money. The time value of money is the concept that money today is worth more than money in the future, because money today can be invested and earn interest. The discount rate is the interest rate used to calculate the present value of a cash flow. In this case, the discount rate is 8%. The present value of the cash flows can be calculated using the following formula:PV = CF1 / (1 + r)^1 + CF2 / (1 + r)^2 + CF3 / (1 + r)^3 + CF4 / (1 + r)^4where:PV is the present value of the cash flowsCF1 is the first cash flowr is the discount rateCF2 is the second cash flowCF3 is the third cash flowCF4 is the fourth cash flowIn this case, the present value of the cash flows is:PV = $100 / (1 + 0.08)^1 + $100 / (1 + 0.08)^2 + $500 / (1 + 0.08)^3 + $100 / (1 + 0.08)^4= $100 / 1.08 + $100 / 1.1664 + $500 / 1.2597 + $100 / 1.3605= $92.59 + $85.73 + $397.06 + $73.50= $649.00

Consider the Following Cash Flows