Question

McCann Co. has identified an investment project with the following cash flows.

Year	Cash Flow
1	$900
2	1,040
3	1,330
4	1,160

a.	If the discount rate is 11 percent, what is the present value of these cash flows?

b.	What is the present value at 20 percent?

c.	What is the present value at 27 percent?
	Please be specific and provide formulas

Answer 1

Solution:

a. The present value of cash flows at 11 % discount rate = $ 3,391.51

b. The present value of cash flows at 20 % discount rate = $ 2,801.31

c. The present value of cash flows at 27 % discount rate = $ 2,448.66

Note :

Formula PV for Year 1 = 1/(1+Discount rate)ⁿ where n =1 ;

For Year 2 = 1/ (1+Disc. rate)ⁿ where n =2 ;

(1+Disc. rate) is raised to the power of n = No. of yrs.

In excel :

PV for Year 1 = 1/ 1.11 = 0.9009

PV for Year 2 = F3 /1.11 = 0.8116

PV for Year 3 = F4 /1.11 = 0.7312 and so on.

Discounted Cash flow = PV Factor * Yearly cash flow.

Thus Year 1 = $ 900 * 0.9009 = $ 810.8108 ;

Year 2 = $ 1,040 * 0.8116 = $ 844.0873 and so on

The above procedure for calculation of PV factor shall be adopted for 20 % discount rate and 27 % discount rate.

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.