Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 10%, then the present value (PV)of this stream of cash flows is closest to:
A)$674
B)$287
C)$460
D)$600

Question

Consider the following timeline detailing a stream of cash flows:  If the current market rate of interest is 10%, then the present value (PV)of this stream of cash flows is closest to:
A)$674 
B)$287 
C)$460 
D)$600

Quizplus · Accepted Answer

To calculate the present value of the cash flows, we need to discount each cash flow back to its present value using the current market rate of interest.

Using a financial calculator, we get:

PV = (-1000/1.1) + (100/1.1^2) + (120/1.1^3) + (300/1.1^4) + (500/1.1^5)

PV = -909.09 + 82.64 + 89.69 + 207.89 + 271.62

PV = $442.75

Therefore, the closest answer is C) $460.

Consider the Following Timeline Detailing a Stream of Cash Flows