ces Exercise 12A-1 (Algo) Basic Present Value Concepts [LO12-7] Annual cash inflows that will arise from two competing investment projects are given below: Investment A Investment B $ 5,000 $ 8,000 6,000 7,000 7,000 6,000 8,000 5,000 $ 26,000 $ 26,000 Year 1 The discount rate is 13%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Required: Compute the present value of the cash inflows for each investment. 1 2 3 2 3 4 Present Value of Year Cash Flows for Investment A 4 Present Value of Cash Flows for Investment B

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Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.