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abozer
abozer,
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I need to solve this mixed cash flows problem. I need to find

Resolved Question:

I need to solve this mixed cash flows problem. I need to find the present value. the discount rate is 12% year 1- 11,000 years 2-5- 5,000/yr and year 6-7,000 I always get the wrong answer. I'm pretty sure I'm getting the PV of year 1 and 6 right, but it's this annuity from 2-5 that is screwing me up
Submitted: 6 years ago.
Category: Math Homework
Expert:  abozer replied 6 years ago.
Chat Conversation Started
abozer :

Hi,

abozer :

You don't need to use the annuity formula here. It is not many years of cash flow.

abozer :

Do the following calculation,

JACUSTOMER-nwlx7eeg- :

Hey

JACUSTOMER-nwlx7eeg- :

ok

JACUSTOMER-nwlx7eeg- :

I can't see it

abozer :

PV = 11,000/(1.12) + 5,000/(1.12)^2 + 5,000/(1.12)^3 + 5,000/(1.12)^4 + 5,000/(1.12)^5 + 7,000/(1.12)^6

abozer :

PV = $26,927.44

abozer :

Let me know if you have any questions.

abozer :

I basically found the present value of each cash flow and added together.

JACUSTOMER-nwlx7eeg- :

thanks but what happens if you do need to use the annuity formula?

JACUSTOMER-nwlx7eeg- :

?

abozer :

We can use it.

abozer :

But you should remember,

abozer :

when we use the present value of an annuity formula,

abozer :

it will give us the value in second year,

abozer :

So then we need to do one more calculation to find the present value of this sum.

abozer :

Let's do the annuity part separately,

JACUSTOMER-nwlx7eeg- :

ok

abozer :

5,000[ (1 - (1 / (1 + 0.12)^4)) / 0.12 ]

JACUSTOMER-nwlx7eeg- :

and is that it?

abozer :

= 15186.75

abozer :

No, that's not it.

abozer :

Now we need to do one more operation to find the present value of this annuity.

abozer :

= 15186.75/(1.12)

abozer :

= 13,559.60

JACUSTOMER-nwlx7eeg- :

ahhh ok, so why is that?

abozer :

the cash flow of $5,000 started in the second year.

abozer :

so when you use the annuity formula you are finding the value in second year.

abozer :

that is not present.

JACUSTOMER-nwlx7eeg- :

oh ok

JACUSTOMER-nwlx7eeg- :

well thanks much

JACUSTOMER-nwlx7eeg- :

I just hit accept?

abozer :

you need to calculate back to the present value by dividing by 1.12.

abozer :

you're welcome.

abozer :

Thanks.

abozer and other Math Homework Specialists are ready to help you