Ronald Slump purchased a real estate investment with the following end-of-year cash flows: What is the present value of these cash flows if the appropriate discount rate is 20%?

Question

Ronald Slump purchased a real estate investment with the following end-of-year cash flows:  What is the present value of these cash flows if the appropriate discount rate is 20%?

Quizplus · Accepted Answer

Using the formula for present value of a cash flow:
PV = CF/(1+r)^n

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

Calculating the present value of each cash flow and adding them together:

PV = 100/1.2 + 100/1.44 + 100/1.728 + 100/2.074 + 1100/2.488

PV = 83.33 + 69.44 + 57.87 + 48.23 + 442.48

PV = $701.35

Therefore, the closest answer choice is C) $133.

Ronald Slump Purchased a Real Estate Investment with the Following