The appropriate discount rate for the following cash flows is 16 percent compounded quarterly. Year Cash...

The appropriate discount rate for the following cash flows is 16 percent compounded quarterly.

Year	Cash Flow
1	$900
2	500
3	0
4	1,200

Required:

What is the present value of the cash flows?

A) $1,739.71

B) $1,810.19

C) $1,775.21

D) $1,810.72

E) $278.95

Expert Solution

Calculation of present value: Interest is compounded quarterly

So, interest rate per quarter = 16 / 4 = 4%

Number of quarters per year = 4

For year 1:

Cash flow = $900

Number of periods = 4

Interest rate, r = 4%

Present value = 900/(1+0.04)^4 = $769.22

For year 2:

Cash flow = $500

Number of periods = 8

Interest rate, r = 4%

Present value =500/(1+0.04)^8 = $365.30

Present Value of Cash flow of Year 3 = $0

For year 4:

Cash flow = $1,200

Number of periods = 16

Interest rate, r = 4%

Present value =1200/(1+0.04)^16= 640.69

Total present value of cash flows = 769.22+365.30+0+640.69= $1775.21
So correct answer is C) $1775.21

jeff jeffy answered 3 years ago

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