The present value of the following cash flow stream is $6,930 when discounted at 9 percent annually. Year Cash Flow 1 $550 2 ? 3 850 4 1,450 What is the value of the missing cash flow?

Year Cash Flow

1          $550

2         $5,634

3         $850

4         $1,450

Net Present value = $6,930

Explanation:

Net present value is the sum of present value of all future cash inflows and outflows of a project using discounting method by a required rate of return. It measure the net value of the project's cash flows in present value term.

Net present Value  = [ FV1 / (1 + r)^1 ] + [ FV2 / (1 + r)^2 ] + [ FV3 / (1 + r)^3 ] + [ FV4 / (1 + r)^4 ]

FV = Future value

r = Required rate of return = 9%

$6,930 = [ $550 / (1 + 0.09)^1 ] + [ FV2 / (1 + 0.09)^2 ] + [ $850 / (1 + 0.09 )^3 ] + [ $1,450 / ( 1 + 0.09 )^4 ]

$6,930 = $504.59 + [ FV2 / (1 + 0.09)^2 ] + 656.36 + 1,027.22

$6,930 = $2,188.16 + [ FV2 / (1 + 0.09)^2 ]

$6,930 - $2,188.16 = [ FV2 / 1.1881 ]

$4,741.84 = [ FV2 / 1.1881 ]

FV = $4,741.84 x 1.1881 = $5,634

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