Question

The present value of the following cash flows at 6% interest would be what?

YEAR                CASH FLOW

    1                    $4 500

    2                    $5 600

    3`                   $8 500

    4                    $9 000

Multiple Choice

• $23 495

• $18 766

• $24 675

• $21 223

Answer 1

A	B	C	D	E	F	G	H	I	J
2
3		Year	0	1	2	3	4
4		Free Cash Flow (FCF)		$4,500	$5,600	$8,500	$9,000
5		MARR (i)	6%
6		(P/F,i,n) for each year		0.94	0.89	0.84	0.79	=1/((1+$D5)^H3)
7		Present Value of cash flows = FCF*(P/F,i,n)		$4,245.28	$4,983.98	$7,136.76	$7,128.84	=H4*H6
8		Total Present value	$23,495	=SUM(E7:H7)
9
10		Hence total present value is	$23,495
11		Thus the first option is correct.
12

Formula sheet

A	B	C	D	E	F	G	H	I	J
2
3		Year	0	1	2	3	4
4		Free Cash Flow (FCF)		4500	5600	8500	9000
5		MARR (i)	0.06
6		(P/F,i,n) for each year		=1/((1+$D5)^E3)	=1/((1+$D5)^F3)	=1/((1+$D5)^G3)	=1/((1+$D5)^H3)	=getformula(H6)
7		Present Value of cash flows = FCF*(P/F,i,n)		=E4*E6	=F4*F6	=G4*G6	=H4*H6	=getformula(H7)
8		Total Present value	=SUM(E7:H7)	=getformula(D8)
9
10		Hence total present value is	=D8
11		Thus the first option is correct.
12