You are thinking of buying a mini golf course.It is expected to generate cash flows of $40 000 per year in years one through four and $50 000 per year in years five through eight.If the appropriate discount rate is 10%, what is the present value of these cash flows?

Question

Quizplus · Accepted Answer

We can use the formula for the present value of an annuity to calculate the present value of the cash flows for each of the two periods, and then add them together to get the total present value.

For the first four years, the present value is:

PV = CF * (1 - 1/(1+r)^n) / r
PV = 40,000 * (1 - 1/(1+0.1)^4) / 0.1
PV = 40,000 * 3.1699
PV = 126,795.84

For the next four years, the present value is:

PV = CF * (1 - 1/(1+r)^n) / r
PV = 50,000 * (1 - 1/(1+0.1)^4) / 0.1
PV = 50,000 * 3.6299
PV = 181,496.76

Adding the two present values together, we get:

PV = 126,795.84 + 181,496.76
PV = 308,292.60

Therefore, the present value of the cash flows is $235,048.

You Are Thinking of Buying a Mini Golf Course