Consider the following uneven cash flow stream: Year Cash Flow 0 $0 1 $250 2 $400 3 $500 4 $600 5 $600 What is the present (Year 0) value if the opportunity cost (discount) rate is 10 percent? A Spreadsheet solution: $1,815.87 B Spreadsheet solution: $1,715.87 C Spreadsheet solution: $1,915.87 D Spreadsheet solution: $1,615.87

The correct answer is: $1715,87

Explanation:

To calculate the present value you need to use the Net Present Value. The NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

The formula is:

n

NPV = ∑ [Rt / (1+i) ^t] - I0

t-1

where:

R t = Net cash inflow-outflows during a single period t

i=Discount rate of return that could be earned in alternative investments

t=Number of timer periods

In this exercise:

NPV = 0 + 250/1,10^1 + 400/1,10^2 + 500/1,10^3 + 600/1,10^4 + 600/1,10^5

NPV = $1715,87