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