You are thinking of buying a miniature golf course. It is expected to generate cash flows of $40,000 per year in years one through four and $50,000 per year in years five through eight. If the appropriate discount rate is 10%, what is the present value of these cash flows?
A) $285,288
B) $167,943
C) $235,048
D) $828,230

Question

Quizplus · Accepted Answer

To find the present value of these cash flows, we use the formula:

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 year, r is the discount rate, and n is the total number of years of cash flows.

Using the above formula, we can find the present value of the cash flows for each time period:

PV of cash flows in years 1-4 = $40,000/(1+0.10)^1 + $40,000/(1+0.10)^2 + $40,000/(1+0.10)^3 + $40,000/(1+0.10)^4
= $108,219.31

PV of cash flows in years 5-8 = $50,000/(1+0.10)^5 + $50,000/(1+0.10)^6 + $50,000/(1+0.10)^7 + $50,000/(1+0.10)^8
= $126,828.84

Therefore, the total present value of the cash flows is:

PV = $108,219.31 + $126,828.84 = $235,048.15

Thus, the answer is C: $235,048.

You Are Thinking of Buying a Miniature Golf Course