I cannot figure out how to do this. Any help would be appreciated.
What is the fair value of a project if it returns $5,000 after one year and $2,000 after two years? The interest rate is 9%
To calculate the fair value of a project, we need to discount the future cash flows using the interest rate. The present value of each cash flow is determined by dividing it by (1+interest rate)^n, where n is the number of years.
Here's how you can calculate the fair value in this scenario:
1. Calculate the present value of the $5,000 cash flow after one year:
PV1 = $5,000 / (1+0.09)^1
2. Calculate the present value of the $2,000 cash flow after two years:
PV2 = $2,000 / (1+0.09)^2
3. Add both present values to get the fair value of the project:
Fair Value = PV1 + PV2
Let's do the calculations:
PV1 = $5,000 / (1+0.09)^1
= $5,000 / 1.09
= $4,587.16 (rounded to the nearest penny)
PV2 = $2,000 / (1+0.09)^2
= $2,000 / 1.1881
= $1,682.50 (rounded to the nearest penny)
Fair Value = PV1 + PV2
= $4,587.16 + $1,682.50
= $6,269.66 (rounded to the nearest penny)
Therefore, the fair value of the project is approximately $6,269.66.