Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 10%, then the present value 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 10%, then the present value of this stream of cash flows is closest to:

Quizplus · Accepted Answer

To calculate the present value of the cash flows, we need to discount each cash flow using the current market rate of interest. We can do this using the formula:

PV = CF/(1+r)^n

Where PV is the present value, CF is the cash flow, r is the interest rate, and n is the number of periods.

Using this formula, we get:

PV of $1000 in year 1 = $1000/(1+0.10)^1 = $909.09

PV of $800 in year 2 = $800/(1+0.10)^2 = $661.16

PV of $600 in year 3 = $600/(1+0.10)^3 = $448.16

PV of $400 in year 4 = $400/(1+0.10)^4 = $279.57

Adding up all the present values, we get:

PV = $909.09 + $661.16 + $448.16 + $279.57 = $2,298.98

Therefore, the present value of the cash flows is closest to $460 (choice C).

Consider the Following Timeline Detailing a Stream of Cash Flows