6. You are scheduled to pay a $350 cash flow in one year, and receive a $1,000 cash flow in years 3 and 4. If interest rates are 10 percent per year, what is the combined present value of these cash flows?
991.38
To find the combined present value of these cash flows, we need to discount each cash flow to its present value and then sum them up. Here's how you can calculate it:
Step 1: Calculate the present value of each cash flow.
The formula to calculate the present value of a future cash flow is:
PV = CF / (1 + r)^n
Where:
PV = Present Value
CF = Cash Flow
r = Interest Rate
n = Number of Periods
For the $350 cash flow in one year (n = 1) with an interest rate of 10% (r = 0.10), the present value would be:
PV1 = $350 / (1 + 0.10)^1 = $350 / 1.10 = $318.18 (rounded to two decimal places)
For the $1,000 cash flows in years 3 and 4, we need to calculate the present value for each cash flow separately.
For the cash flow in year 3 (n = 3), the present value would be:
PV3 = $1,000 / (1 + 0.10)^3 = $1,000 / 1.331 = $751.31 (rounded to two decimal places)
For the cash flow in year 4 (n = 4), the present value would be:
PV4 = $1,000 / (1 + 0.10)^4 = $1,000 / 1.464 = $682.65 (rounded to two decimal places)
Step 2: Sum up the present values of all cash flows.
Combined Present Value = PV1 + PV3 + PV4
= $318.18 + $751.31 + $682.65
= $1,752.14 (rounded to two decimal places)
Therefore, the combined present value of these cash flows is $1,752.14.