The present value of the following cash flows is known to be $6,939.91; $500 today,$2,000 in 1 year,and $5,000 in 2 years.What discount rate is being used?
A) 3%
B) 4%
C) 5%
D) 6%

Question

Quizplus · Accepted Answer

The present value formula can be written as:
PV = CF1 / (1+r)^1 + CF2 / (1+r)^2 + CF3 / (1+r)^3
Where PV = Present Value, CF = Cash Flow, and r = discount rate

Substituting the given values:
6939.91 = 500 / (1+r)^1 + 2000 / (1+r)^2 + 5000 / (1+r)^3

Solving this equation using trial and error method or using financial calculators, we get r = 5%. Therefore, the discount rate being used is 5%.

The Present Value of the Following Cash Flows Is Known