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Don is thinking of borrowing $10,000 from Hancock Whitney Bank. He promises Hancock Whitney cash flows of $5,000 every year for the next three years. If Hancock Whitney Bank's cost of capital is 10%, what is the present value of the stream of cash flows?

Answer :

The present value of the stream of cash flows is $2,434.26.

What is the present value?

Present value is the sum of discounted cash flows. The cash flows would be discounted using the cost of capital.

Present value = C / (1 + r)^n

Where:

  • C = cash flow
  • r = cost of capital
  • n = number of years

-10,000 + [5,000 / 1.1] + [5000 / 1.1²] +  [5000 / 1.1³] = $2,434.26

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