An investment promises the following cash flow stream: $1,000 at Time 0; $2,000 at the end of Year 1 (or at t = 1); $3,000 at the end of Year 2; and $5,000 at the end of Year 3. At a discount rate of 4.3%, what is the present value of the cash flow stream?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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An investment promises the following cash flow stream: $1,000 at Time 0; $2,000 at the end of Year 1 (or at t = 1); $3,000
at the end of Year 2; and $5,000 at the end of Year 3. At a discount rate of 4.3%, what is the present value of the cash flow
stream?
Your answer should be between 8343.00 and 11,000.00, rounded to 2 decimal places, with no special
characters.
Transcribed Image Text:An investment promises the following cash flow stream: $1,000 at Time 0; $2,000 at the end of Year 1 (or at t = 1); $3,000 at the end of Year 2; and $5,000 at the end of Year 3. At a discount rate of 4.3%, what is the present value of the cash flow stream? Your answer should be between 8343.00 and 11,000.00, rounded to 2 decimal places, with no special characters.
Expert Solution
Present Value:

The present value of a series of cash flows refers to the current value of a future stream of cash flows, discounted to account for the time value of money. In other words, it is the value today of a series of future cash flows.

 

To calculate the present value of a series of cash flows, you need to discount each future cash flow back to its present value using an appropriate discount rate. The discount rate is typically based on the opportunity cost of capital, or the rate of return required by an investor.

 

The formula for calculating the present value of a series of cash flows is:

 

PV = C1/(1+r)^1 + C2/(1+r)^2 + C3/(1+r)^3 + ... + Cn/(1+r)^n

 

Where PV is the present value, C is the cash flow in each period, r is the discount rate, and n is the number of periods.

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