We determine the present value of each future amount

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Unformatted text preview: cash flows over the next 5 years: End of year Cash flow 1 $400 2 800 3 500 4 400 5 300 152 PART 2 Important Financial Concepts If the firm must earn at least 9% on its investments, what is the most it should pay for this opportunity? This situation is depicted on the following time line: Time line for present value of a mixed stream (end-of-year cash flows, discounted at 9% over the corresponding number of years) 0 1 2 $400 End of Year 3 $800 4 $400 $500 5 $300 $ 366.80 673.60 386.00 283.20 195.00 Present Value $1,904.60 Table Use To solve this problem, determine the present value of each cash flow discounted at 9% for the appropriate number of years. The sum of these individual values is the present value of the total stream. The present value interest factors required are those shown in Table A–2. Table 4.4 presents the calculations needed to find the present value of the cash flow stream, which turns out to be $1,904.60. Calculator Use You can use a calculator to find the present value of each individua...
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