Question

Huggins Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows? What is the present value at 18 percent? At 24 percent? Year Cash Flow 1 $ 680 2 810 3 940 4 1,150

Answer 1

Solution:

Present value os today\'s value of cash flows occuring in thefuture. The present value of cash flows can be calculated with theuse of following formula:

Present Value of Cash Flows = Cash Flow Year 1/(1+DiscountRate)^1 + Cash Flow Year 2/(1+Discount Rate)^2 + Cash Flow Year3/(1+Discount Rate)^3 + Cash Flow Year 4/(1+Discount Rate)^4

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Part 1)

Using the values provided in the question in the above formula,we get,

Present Value of Cash Flows = 680/(1+10%)^1 +810/(1+10%)^2 + 940/(1+10%)^3 + 1,150/(1+10%)^4 =$2,779.30

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Part 2)

Using the values provided in the question in the above formula,we get,

Present Value of Cash Flows = 680/(1+18%)^1 +810/(1+18%)^2 + 940/(1+18%)^3 + 1,150/(1+18%)^4 =$2,323.27

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Part 3)

Using the values provided in the question in the above formula,we get,

Present Value of Cash Flows = 680/(1+24%)^1 +810/(1+24%)^2 + 940/(1+24%)^3 + 1,150/(1+24%)^4 =$2,054.62

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Tabular Representation:

Discount Rate	Present Value
10%	$2,779.30
18%	$2,323.27
24%	$2,054.62