Copyright

Which choice has a greater present value if we assume a required rate of return of 11%? (1) A...

Question:

Which choice has a greater present value if we assume a required rate of return of 11%?

(1) A lump-sum cash flow today of $248.69

(2) $100 cash flows occurring 1, 2, and 3 years from today

(3) A single cash flow of $331, 3 years from today

The present value of cash flows:

Present value is the concept that states an amount of money today is worth more than that same amount in the future. The present value of cash flows is the current value of a future sum of money or stream of cash flows discounted at the required rate of return.

Answer and Explanation:

1) The present value is $248.69 as the cash flows are received as of now

2)

  • The cash flows of $100 is received at the end of every year
  • the time period is 3 years
  • the discount rate is 11%

Using the present value table for an annuity at 11% interest at the end of 3 years the Present value factor is 2.444

The present value of cash flows = cash flows on a yearly basis x present value factor of an annuity at 11% interest at the end of 3 years

=$100 x 2.444

=$244.40

The present value of the cash flows is $244

3)

  • The cash flows of $331 is received at the end of year 3
  • the discount rate is 11%

Using the present value table for a single future amount at 11% interest at the end of 3 years the Present value factor is 0.7312

The present value of cash flow = cashflow amount x present value table for a single future amount at 11% interest at the end of 3 years

=$ 331 x 0.7312

=$242.03

The present value of cash flow is $242.03

The present value of cash flows is highest at $248.69 and, the answer is choice "1"


Learn more about this topic:

Loading...
Discounted Cash Flow, Net Present Value & Time Value of Money

from Accounting 102: Intro to Managerial Accounting

Chapter 8 / Lesson 4
4.1K

Related to this Question

Explore our homework questions and answers library