Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 8%, then the present value (PV)of this stream of cash flows is closest to ________.

Question

Consider the following timeline detailing a stream of cash flows:  If the current market rate of interest is 8%, then the present value (PV)of this stream of cash flows is closest to ________.

Quizplus · Accepted Answer

To calculate the present value (PV) of the stream of cash flows, we need to discount each cash flow using the current market rate of interest. Using the formula for present value of an annuity:

PV = C x ((1 - (1+r)^(-n)) / r)

where C is the cash flow, r is the discount rate (8%), and n is the time period.

Discounting each cash flow and adding them together, we get:

PV = 100/(1+0.08)^1 + 200/(1+0.08)^2 + 300/(1+0.08)^3 + 400/(1+0.08)^4

PV = $484.36, which is closest to answer choice C ($484).

Consider the Following Timeline Detailing a Stream of Cash Flows