You are evaluating a project with cash flows of ₹1,200 in the first year, ₹900 in the second year, and ₹1,500 in the third year. If the discount rate is 12%, what is the present value of these cash flows?
Question
You are evaluating a project with cash flows of ₹1,200 in the first year, ₹900 in the second year, and ₹1,500 in the third year. If the discount rate is 12%, what is the present value of these cash flows?
Solution
To calculate the present value of the cash flows, we need to discount each cash flow to its present value using the discount rate of 12%.
Step 1: Calculate the present value of the first year cash flow: PV1 = ₹1,200 / (1 + 0.12)^1 PV1 = ₹1,200 / 1.12 PV1 = ₹1,071.43
Step 2: Calculate the present value of the second year cash flow: PV2 = ₹900 / (1 + 0.12)^2 PV2 = ₹900 / 1.2544 PV2 = ₹717.13
Step 3: Calculate the present value of the third year cash flow: PV3 = ₹1,500 / (1 + 0.12)^3 PV3 = ₹1,500 / 1.4049 PV3 = ₹1,067.84
Step 4: Calculate the total present value of the cash flows: Total PV = PV1 + PV2 + PV3 Total PV = ₹1,071.43 + ₹717.13 + ₹1,067.84 Total PV = ₹2,856.40
Therefore, the present value of the cash flows is ₹2,856.40.
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