Calculate Present Value of Cash Flows: CFA Level 1 Exam

D

The present value = 2,200/1.08 + 3,000/(1.08^2) + 7,300/(1.08^3) = 10,404

To calculate the present value of the cash flows, we need to discount each cash flow back to its present value using the discount rate of 8% per year. The formula to calculate the present value is:

PV = CF / (1 + r)^n

Where: PV = Present value CF = Cash flow r = Discount rate n = Number of periods

Let's calculate the present value of each cash flow and sum them up:

Year 1 cash flow: PV1 = $2,200 / (1 + 0.08)^1 PV1 = $2,200 / 1.08 PV1 ≈ $2,037.04

Year 2 cash flow: PV2 = $3,000 / (1 + 0.08)^2 PV2 = $3,000 / 1.1664 PV2 ≈ $2,571.54

Year 3 cash flow: PV3 = $7,300 / (1 + 0.08)^3 PV3 = $7,300 / 1.2597 PV3 ≈ $5,792.30

Now, sum up the present values of the cash flows:

PV = PV1 + PV2 + PV3 PV ≈ $2,037.04 + $2,571.54 + $5,792.30 PV ≈ $10,400.88

The present value of the cash flows, rounded to the nearest dollar, is approximately $10,401.

Looking at the answer options provided:

A. $11,239 B. $14,155 C. $9,876 D. $10,404

The closest answer to our calculated present value is option D, $10,404.