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PV of multiple cash flows: Ajax Corp. is expecting the following cash flows: $79,000, $112,000,...

Question:

PV of multiple cash flows: Ajax Corp. is expecting the following cash flows: $79,000, $112,000, $164,000, $84,000, and $242,000 over the next five years. If the company's opportunity cost is 15 percent, what is the present value of these cash flows?

Present Value of Project:

The present value of a given stream of prospective cash flows gives an equivalent value as of today. The calculated present value is governed by the magnitude of cash flows, the relevant opportunity cost, and the life of the project. Other techniques such as internal rate of return method, payback period method etc. may also be used for evaluation of projects.

Answer and Explanation:

The present value of the given cash flows is $429,560.45.

The present value of the investment can be figured out by taking a sum of present values of all the cash flows where the discount factor consists of the opportunity cost of 15% (0.15) and its exponential power indicates the timing of the respective cash flow as shown below:

Net present value:

  • {eq}= \dfrac{\$79,000}{1.15^1} + \dfrac{\$112,000}{1.15^2} + \dfrac{\$164,000}{1.15^3} + \dfrac{\$84,000}{1.15^4} + \dfrac{\$242,000}{1.15^5} {/eq}
  • = $429,560.45

Learn more about this topic:

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How to Calculate Present Value of an Investment: Formula & Examples

from Introduction to Business: Homework Help Resource

Chapter 24 / Lesson 15
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