Question

What is the present value of the following cash-flow stream if the interest rate is 5%

Year Cash Flow
1 $ 190
2 390
3 290

Answer 1

The present value of the cash flows is $ 786.

Step-by-step explanation:

This problem requires us to calculate present value of cash flows given in the question. The present value can be calculated by discounting cash flows using interest rate (5%) as discount factor.

PV= (190* (1+5%)^-1)+(390* (1+5%)^-2)+(290* (1+5%)^-3)

PV = 181 + 354 + 251

PV = $ 786

(Discount factor = CF (1+interest rate)^-period)