Assume that your required rate of return is 12 percent and you are given the following stream of cash flows: $$\begin{array} { l c }
\underline{ \text {Year } } & \underline{\text { Cash Flow} } \
1 & \$ 10,000 \
2 & 15,000 \
3 & 15,000 \
4 & 15,000 \
5 & 15,000 \
5 & 20,000
\end{array}$$ If payments are made at the end of each period, what is the present value of the cash flow stream?
A)$66,909
B)$57,323
C)$61,815
D)$52,345
E)$62,029

Question

Assume that your required rate of return is 12 percent and you are given the following stream of cash flows: $$\begin{array} { l c } 
\underline{ \text {Year } } & \underline{\text { Cash Flow} } \
1 & \$ 10,000 \
2 & 15,000 \
3 & 15,000 \
4 & 15,000 \
5 & 15,000 \
5 & 20,000
\end{array}$$ If payments are made at the end of each period, what is the present value of the cash flow stream?
A)$66,909
B)$57,323
C)$61,815
D)$52,345
E)$62,029

Quizplus · Accepted Answer

The correct answer is A because the present value of the cash flow stream is $66,909. This can be calculated using the following formula:PV = CF1 / (1 + r) + CF2 / (1 + r)^2 + CF3 / (1 + r)^3 + CF4 / (1 + r)^4 + CF5 / (1 + r)^5 + CF6 / (1 + r)^6where:PV is the present valueCF1 is the cash flow in year 1r is the required rate of returnn is the number of yearsPlugging in the values from the question, we get:PV = 10,000 / (1 + 0.12) + 15,000 / (1 + 0.12)^2 + 15,000 / (1 + 0.12)^3 + 15,000 / (1 + 0.12)^4 + 15,000 / (1 + 0.12)^5 + 20,000 / (1 + 0.12)^6PV = $66,909

Assume That Your Required Rate of Return Is 12 Percent