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Rainbow bought a new home entertainment system today from Andre’s Electronics. She will receive a cash rebate of $230 from Andre’s Electronics today, pay $720 to Andre’s Electronics in 1 year, receive a cash rebate of $1,640 from Andre’s Electronics in 2 years, and pay $4,980 to Andre’s Electronics in 4 years. If the discount rate is 18.94 percent, then what is the present value of the cash flows associated with this transaction?

Respuesta :

Answer:

-$1,704.45

Explanation:

The computation of the present value is shown below:

Year       Cash inflows    Discount factor       Present value

                                        @18.94%

0                $230.00                1           $230.00

1                -$720.00 0.8407600471  -$605.35

2                $1,640.00 0.7068774568   $1,159.28

3                 $0.00         0.5943143238   $0.00

4               -$4,980.00 0.4996757389 -$2,488.39

Total present value is                                     -$1,704.45

The discount factor is computed below:

= 1 ÷ (1 + rate)^years

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