FREE online courses on Capital Budgeting Analysis - Calculating the Discounted Cash Flows - Calculating the Present Value of Cash Flows

 

Our next step is to calculate present values of our two cash flow streams. We will use our cost of capital to discount the cash flows. We will assume that our cost of capital is 12%. We will use the present value tables in Exhibits 1 and 2 for finding the appropriate discount factor per the life of our cash streams and the 12% cost of capital.

 

Example 8 -  Calculate Present Value of Cash Flows

 

Annual Project Cash Flows                       $ 5,788

Discount Factor per Exhibit 2                   x 3.605 (1)

Present Value of Annual Flows                                     $ 20,866

 

Terminal Cash Flow                                $ 3,250

Discount Factor per Exhibit 1                   x .567 (2)

Present Value of Terminal Flow                                    $1,843

 

 Total Present Value                                                  $ 22,709

 

(1): We use the Annuity Table since we have the same cash flows each year for the next 5 years. If we look at Exhibit 2 for n = 5 years and 12%, we find 3.605

(2): We need to discount the terminal cash flow received five years from now to the present by using the Present Value Table in Exhibit 1.