Which of the following statement is correct?
A) Present value of any future cash flow stream is a sum of present value of each cash flow in the stream.
B) Present value of any future cash flow stream is a sum of future value of each cash flow in the stream.
C) Present value of any future cash flow stream is a sum of the value of each cash flow in the stream.
D) None of the above

Question

Quizplus · Accepted Answer

The present value of any future cash flow stream is the sum of the present value of each cash flow in the stream. This is because the present value represents the value of the cash flow today, while the future cash flows are discounted to account for the time value of money. Therefore, we need to discount each future cash flow to its present value using an appropriate discount rate and then sum them up to arrive at the present value of the entire stream. Option B is incorrect as we cannot sum up the future value of each cash flow in the stream to determine the present value of the stream, as we need to take into account the time value of money. Option C is incorrect as the value of each cash flow on its own does not account for the time value of money and cannot be added up as is to determine the present value of the stream.

Which of the Following Statement Is Correct