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The Purple Lion Beverage Company expects the following cash flows from its manufacturing plant in Palau over the next five years:
Annual Cash Flows
Year 1 Year 2 Year 3 Year 4 Year 5
$250,000 $37,500 $480,000 $300,000 $550,000
Required:
a) The CFO of the company believes that an appropriate annual interest rate on this investment is 4%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar?

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facundobuzzetti

Answer:

Total= $1410,274.89

Explanation:

Giving the following information:

Year 1 Year 2 Year 3 Year 4 Year 5

$250,000 $37,500 $480,000 $300,000 $550,000

Interest rate= 4%

To determine the present value, we need to use the following formula on each cash flow:

PV= FV/(1+i)^n

Year 1= 250,000/1.04= 240,384.61

Year 2= 37,500/1.04^2= 34,670.86

Year 3= 480,000/1.04^3= 426,718.25

Year 4= 300,000/1.04^4= 256,441.26

Year 5= 550,000/1.04^5= 452,059.91

Total= $1410,274.89

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