Designs Now is opening a showcase office to display and sell its computer-designed poster art. Designs expects cash flows to be $120,000 in the first year, $180,000 in the second year, $240,000 in the third year. If Designs uses 11 percent as its discount rate, what is the present value of the cash flows?
A) $429,720
B) $457,620
C) $456,000
D) $424,820

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of the cash flows is $429,720. This is calculated by using the formula for the present value of an annuity, which is:PV = CF * [1 - (1 + r)^-n] / rwhere:PV is the present valueCF is the cash flowr is the discount raten is the number of yearsIn this case, the cash flows are $120,000, $180,000, and $240,000, the discount rate is 11%, and the number of years is 3. Plugging these values into the formula, we get:PV = $120,000 * [1 - (1 + 0.11)^-3] / 0.11= $120,000 * [1 - 0.743] / 0.11= $120,000 * 0.257 / 0.11= $429,720

Designs Now Is Opening a Showcase Office to Display and Sell