Present Value Question

[FINHELP]

I am having a problem figuring out the following problem. I think I may be making it more difficult that it really is. Can someone help me walk through this problem.

A project is expected to earn $200, $300 and $400 for the next three years. What is the present value of these cash flows at a 10 percent discount rate?

My thought is to multiply cash flows x Interest factor to get present value for each year separately. Then add them up to obtain the aggregate present value. Am I close? There is a chart in the back of my book to look up the interest factor.

 

[tkhunny]

Maybe. I don't understand two things from your description:

1) "10 percent discount factor" - Are you sure you mean this? Or do you mean a discount factor calculated from 10% annual interest?
2) "for each year separately" - If this means discount the first one year, the second two years, and the third three years, then yes.

You can also do it sequentially:

400.00 / 1.10 = 363.64 -- This brings the third back to the second, giving now 363.64 + 300.00 = 663.64
663.64 / 1.1 = 603.31 -- This brings the third and the second back to the first, giving now 603.31 + 200.00 = 803.31
803.31 / 1.1 = 730.28 -- This brings all three to the beginning.

On warning, there was a whole lot of rounding of intermediate values in there. Careful with that.

 

[FINHELP]

Thanks