Question

In: Finance

1. You expect to receive $4,400 upon your graduation and will invest your windfall at an...

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

Year. Cash Flow

1. $950

2. 1,050

3. 1,330

4. 1,160

a. If the discount rate is 8 percent, what is the present value of these cash flows?

b. What is the present value at 19 percent?

c. What is the present value at 26 percent?

Solutions

Expert Solution

Given

present value = $4,400

future value = $5,725

interest rate = 0.69 % = 0.0069

Apply future value formula as below

future value = present value*(1+r)^t

Applying the value in above formula

$5,725= $4400*(1.0069)^t

$5,725/$4400= (1.0069)^t

$1.3011=(1.0069)^t

take ln both side we get**

ln (1.3011) = t × ln(1.0069)

0.263210061= t*0.00687630394

0.263210061/0.00687630394

t = 38.2778398 quarters

so time in years will be

time = 38.2778398/4 Years

time = 9.569 years

** Note : x^n=y (use natural log calculator)

n=logy

logx

=log1.3011

log1.0069

=0.263210061

0.00687630394

=38.2778398

Present Value=FV/(1+r)^n

where:FV=Future Value

r=Rate of return

n=Number of periods

similarly

Year	Annual cash flows ($)	Present Value Factor (PVF) at 8.00%	Present Value of annual cash flows ($)

[Annual cash flow x PVF]

1	950	0.9259	879.605
2	1,050	0.8573	900.165
3	1,330	0.7938	1055.754
4	1,160	0.735	852.6

TOTAL			3688.124

The Present value of the cash flows will be $3688.124

Year	Annual cash flows ($)	Present Value Factor (PVF) at 19.00%	Present Value of annual cash flows ($)

[Annual cash flow x PVF]

1	950	0.8403	798.285
2	1,050	0.7062	741.51
3	1,330	0.5934	789.222
4	1,160	0.4987	578.492

TOTAL			2907.509

The Present value of the cash flows will be $2907.509

Year	Annual cash flows ($)	Present Value Factor (PVF) at 26.00%	Present Value of annual cash flows ($)

[Annual cash flow x PVF]

1	950	0.7937	754.015
2	1,050	0.6299	661.395
3	1,330	0.4999	664.867
4	1,160	0.3968	460.288

TOTAL			2540.565

The Present value of the cash flows will be $2540.565

jeff jeffy answered 2 years ago

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