Question

How much money can a production company that makes fluidized bed scrubbers spend now instead of spending $160,000 in year 5 if the interest rates are estimated to be 10% per year in years 1 to 3 and 17% per year in years 4 and 5?

The company can spend $  .

Answer 1

Cash Outflow in Year 5 = $160,000

Interest Rate, Year 1 = 10%
Interest Rate, Year 2 = 10%
Interest Rate, Year 3 = 10%
Interest Rate, Year 4 = 17%
Interest Rate, Year 5 = 17%

Value of Cash Outflow at the end of Year 3 = $160,000/1.17^2
Value of Cash Outflow at the end of Year 3 = $116,882.168

Present Value of Cash Outflow = $116,882.168/1.10^3
Present Value of Cash Outflow = $87,815.30

So, company should spend $87,815.30 today.