Huggins Co. has identified an investment project with the following cash flows.

Problem 6-1 Present Value and Multiple Cash Flows [LO1]

Huggins Co. has identified an investment project with the following cash flows.

                          

Year				Cash Flow
	1			$	830
	2				1,150
	3				1,410
	4				1,550

 
 

If the discount rate is 8 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

Present value

$

 

What is the present value at 16 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

Present value

$

  

What is the present value at 25 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

Present value

$

 

Explanation:

The time line is:

0	1	2	3	4
PV	$830	$1,150	$1,410	$1,550

To solve this problem, we must find the PV of each cash flow and add them. To find the PV of a lump sum, we use:

PV = FV / (1 + r)t

PV@8% = $830 / 1.08 + $1,150 / 1.082 + $1,410 / 1.083 + $1,550 / 1.084  = $4,013.06

PV@16% = $830 / 1.16 + $1,150 / 1.162 + $1,410 / 1.163 + $1,550 / 1.164  = $3,329.53

PV@25% = $830 / 1.25 + $1,150 / 1.252 + $1,410 / 1.253 + $1,550 / 1.254   = $2,756.80

   

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

  

CFo	$0	CFo	$0	CFo	$0
C01	$830	C01	$830	C01	$830
F01	1	F01	1	F01	1
C02	$1,150	C02	$1,150	C02	$1,150
F02	1	F02	1	F02	1
C03	$1,410	C03	$1,410	C03	$1,410
F03	1	F03	1	F03	1
C04	$1,550	C04	$1,550	C04	$1,550
F04	1	F04	1	F04	1
I = 8		I = 16		I = 25
NPV CPT		NPV CPT		NPV CPT
$4,013.06		$3,329.53		$2,756.80