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Assume that the correct discount rate for the following cash flows is 8%
Assume that the correct discount rate for the following cash flows is 8%. Today is January 1, year 1. Calculate the present value of each of the following cash flows.
a. $50 at the end of 3 years, i.e., December 31, year 3
b. $50 at the end of 100 years, i.e., December 31, year 100
c. $50 received at the end of each year for 20 years, i.e., December 31 each year from year 1 to year 20
d. $50 received at the beginning of each year for 20 years, i.e., January 1 each year from year 1 to year 20
Expert Solution
Computation of Present Value:
a) $50 at the end of 3 years, i.e., December 31, year 3
Present Value = 50*PVIF(8%,3)
= 50*0.7938
= $39.69
.
b) $50 at the end of 100 years, i.e., December 31, year 100
Present Value = 50*PVIF(8%,100)
= 50* 0.0005
= $0.025
.
c) $50 received at the end of each year for 20 years, i.e., December 31 each year from year 1 to year 20
Present Value = 50*PVIFA(8%,20)
= 50* 9.8181
= $490.91
.
d) $50 received at the beginning of each year for 20 years, i.e., January 1 each year from year 1 to year 20
Present Value = 50 + 50*PVIFA(8%,19)
=50 + 50* 9.6036
= $50 + $480.18
= $530.18
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