A Project Anticipates Net Cash Flows of $10,000 at the End

question 104

Multiple Choice

A project anticipates net cash flows of $10,000 at the end of year one, with such amount growing at the expected 5 percent rate of inflation over the subsequent four years.Calculate the real present value of this five-year cash stream if the firm employs a nominal discount rate of 15 percent.

• A)$33,522
• B)$38,377
• C)$43,294
• D)$55,000

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Definitions:

Compounded Annually

The process of adding the accumulated interest back to the principal sum at the end of each year, so that interest is earned on interest from that point forward.

Accountant

An accountant is a professional who performs accounting functions such as audits or financial statement analysis according to prescribed methods.

Retire

To retire means to withdraw from active working life, often due to reaching a certain age or completing enough years of service to qualify for pension benefits.

Compounded Annually

The process of earning interest on both the initial principal and the accumulated interest from previous periods on a yearly basis.