Question

A publisher is deciding whether or not to invest in a new printer. The printer would cost $900, and would increase the cash flows in year 1 by $500 and in year 3 by $800. Cash flows do not change in year 2. If the interest rate is 12%, what is the present value of the cash flows from the investment

Answer 1

Answer:

The present value of the cash flows from the investment is $1015.85.

Explanation:

The present value of the cash flows can be calculated using the discounted cash flows approach also known as the DCF approach. Under this approach, the cash flows are discounted to the present day value using a certain discount rate.

The formula to calculate the present value of the cash flows is,

Present value = CF1 / (1+i) + CF2 / (1+i)^2 + ... + CFn / (1+i)^n

Where,

• CF are the cash flows
• i is the interest rate which is also the discount rate

Present value = 500 / (1+0.12)  +  800 / (1+0.12)^3

Present value = $1015.85277 rounded off to $1015.85