Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 8%, then the present value of this stream of cash flows is closest to:
A)$22,871
B)$21,211
C)$24,074
D)$26,000

Question

Consider the following timeline detailing a stream of cash flows:  If the current market rate of interest is 8%, then the present value of this stream of cash flows is closest to:
A)$22,871 
B)$21,211 
C)$24,074 
D)$26,000

Quizplus · Accepted Answer

To calculate the present value of the cash flows, we need to discount each cash flow to present day. 
To get the discount factor, we use the following formula: 
Discount Factor = 1/ (1 + i)n,  where i is the market rate of interest and n is the number of years from present day to the year in which the cash flow is received.

Using this formula, we get the following table:

Year	Cash Flow	Discount Factor	Present Value
0	0	1.00	0
1	4,000	0.93	3,720
2	4,000	0.86	3,448
3	4,000	0.79	3,160
4	4,000	0.73	2,930
5	4,000	0.68	2,724
6	6,000	0.63	3,780
Total				       19,762

Summing up the present values, we get a total of $19,762. Therefore, the closest option is B ($21,211). The other options are either too high or too low, indicating an error in calculation.

Consider the Following Timeline Detailing a Stream of Cash Flows