Wilkinson co. has identified an investment project with the following cash flows: year cash flow 1 $ 730 2 950 3 1,210 4 1,300 if the discount rate is 8 percent, what is the present value of these cash flows?

$3406.48

Explanation:

The computation of the present value is shown below

= Present value of all yearly cash inflows after applying discount factor

The discount factor should be computed by

= 1 ÷ (1 + rate) ^ years

where,  

rate is 8%  

Year = 0,1,2,3,4 and so on

Discount Factor:

For Year 1 = 1 ÷ 1.08^1 = 0.9259

For Year 2 = 1 ÷ 1.08^2 = 0.8573

For Year 3 = 1 ÷ 1.08^3 = 0.7938

For Year 4 = 1 ÷ 1.08^4 = 0.7350

So, the calculation of a Present value of all yearly cash inflows are shown below

= Year 1 cash inflow × Present Factor of Year 1 + Year 2 cash inflow × Present Factor of Year 2 + Year 3 cash inflow × Present Factor of Year 3 + Year 4 cash inflow × Present Factor of Year 4

= $730 × 0.9529 + $950 × 0.8573 + $1,210 × 0.7938 + $1,300 × 0.7350

= $675.93 + $814.47 + $960.54 + $955.54

= $3406.48

We take the first four digits of the discount factor.  

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