Question

Mendez Company has identified an investment project with the following cash flows.

Year Cash Flow
1 $ 470
2 610
3 735
4 920
If the discount rate is 10 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

To calculate the present value of the cash flows, use the present value formula PV = CF / (1 + r)^n. Calculate the present value for each cash flow and then add them up to find the total present value.

Step-by-step explanation:

To calculate the present value of these cash flows, we need to discount each cash flow back to the present using the discount rate. The formula for calculating the present value is PV = CF / (1 + r)^n, where PV is the present value, CF is the cash flow, r is the discount rate, and n is the number of years.

Let's calculate the present value for each cash flow:

Year 1: PV = 470 / (1 + 0.10)^1 = 427.27

Year 2: PV = 610 / (1 + 0.10)^2 = 496.69

Year 3: PV = 735 / (1 + 0.10)^3 = 604.94

Year 4: PV = 920 / (1 + 0.10)^4 = 674.04

Now, let's add up the present values to find the total present value:

Total Present Value = 427.27 + 496.69 + 604.94 + 674.04 = 2,202.94

Therefore, the present value of these cash flows is $2,202.94.