Question

Using the following to answer question 1(a) and 1(b) 1(a) What is PV in year 2? With interest rate 7%, calculate the PV of following cash flows. Year Payment PV 1,000 1,000 1,000 1,000 1,000 2 4

Answer 1

Present Value (PV) of a cash flow is the discounted value of cash flow with required rate of return(interest rate)

$PV = \frac{C}{(1+i)^n}$

where,

C = cash flow of period

i = interest rate

n = period

Please refer below spreadsheet for calculation of Present value of cash flow at 7% interest rate.

Formula reference -

Thus, PV of year 2 cash flow is 873.44.