George William buys a machine for his business. The machine costs $150,000. George estimates that the machine can produce $40,000 cash inflow per year for the next five years. George's cost of capital is 10 percent. What is the approximate present value of the future cash flow for George?

Question

Quizplus · Accepted Answer

The present value (PV) of the future cash flows can be calculated using the formula for the present value of an annuity: PV = P * [(1 - (1 + r)^-n) / r], where P is the annual cash inflow, r is the discount rate (cost of capital), and n is the number of periods. Substituting the given values (P = $40,000, r = 0.10, n = 5) into the formula gives a present value of approximately $151,632.

George William Buys a Machine for His Business