Discounting future cash flow to the present period is common in capital budgeting. If positive cash flow at the end of year 2 is $132,000, the interest rate for year 1 is 10 percent, and the interest rate for year 2 is 20 percent, the present value of the $132,000 at the beginning of year 1 is
A)$100,000
B)$110,000
C)$120,000
D)$132,000

Question

Quizplus · Accepted Answer

To find the present value of $132,000 at the beginning of year 1, we need to discount it for two years. For year 2, we use the 20% interest rate: $132,000 / (1 + 0.20) = $110,000. Then, we discount this amount for year 1 using the 10% interest rate: $110,000 / (1 + 0.10) = $100,000.

Discounting Future Cash Flow to the Present Period Is Common