Figure 14-6.Present value of $1
Present value of an Annuity of $1

-Refer to Figure 14-6. Jan Rigby is considering an investment that will cost $20,000 initially, and return annual cash flows of $10,000 in each of three years. Jan requires a minimum rate of return of 8%. What is the present value of the cash inflows? (Note: there may be a rounding error depending on the table you use to compute your answer. Choose the answer closest to the one you calculate.)

Question

Figure 14-6.Present value of $1
  Present value of an Annuity of $1
 
-Refer to Figure 14-6. Jan Rigby is considering an investment that will cost $20,000 initially, and return annual cash flows of $10,000 in each of three years. Jan requires a minimum rate of return of 8%. What is the present value of the cash inflows? (Note: there may be a rounding error depending on the table you use to compute your answer. Choose the answer closest to the one you calculate.)

Quizplus · Accepted Answer

The present value can be calculated by finding the present value of each cash flow and adding them up. Using the present value of an annuity of $1 table, the present value of $10,000 for 3 years at 8% is $22,577, which when multiplied by 0.862 equals $19,477 (present value of $1 for 3 years at 8%). Adding this value to the present value of the final cash flow of $10,000 (present value of $1 for one year at 8% equals 0.926) gives a total present value of $25,770.

Figure 14-6.Present Value of $1