Answer:
Total PV= $3,078.22
Explanation:
Giving the following information:
Cash flows:
Cf1= $600
Cf2= $1,200
Cf3= $1,800
Interest rate= 7%
To calculate the present value, we need to apply the following formula to each cash flow:
PV= Cf/(1+i)^n
PV1= 600/1.07= 560.75
PV2= 1,200/(1.07^2)= 1,048.13
PV3= 1,800/(1.07^3)= 1,469.34
Total PV= $3,078.22
The present value of the cash flows at an interest rate of 7% is approximately $3,080.
Present value is the concept that states the amount of money today is worth more than the amount of money in the future. The formula to calculate the present value of cash flows is:
[tex]\rm PV = FV\dfrac{1}{(1+r)^n}[/tex], where PV is the present value, FV is the future value, r is the rate of return and n is the number of periods.
The present value of $600 at the end of first year is:
[tex]\rm PV = 600\dfrac{1}{(1+0.07)^1}\\\\PV = 600\dfrac{1}{(1.07)^1}\\\\PV = \$512.82[/tex]
The present value of $1,200 at the end of the second year is:
[tex]\rm PV = 1,200\dfrac{1}{(1+0.07)^2}\\\\PV = 1,200\dfrac{1}{(1.07)^2}\\\\PV = \$1,048.13[/tex]
The present value of $1,800 at the end of the third year is:
[tex]\rm PV = 1,800\dfrac{1}{(1+0.07)^3}\\\\PV = 1,800\dfrac{1}{(1.07)^3}\\\\PV = \$1,469.34[/tex]
Therefore the total present value of the cash flows is:
[tex]\rm Total\:PV= \$560.75+\$1,048.13+\$1,469.34\\\\\rm Total\:PV= \$3,078.22[/tex]
Therefore the correct option is $3,080.
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