At the end of a fiveyear life a company will dispose of an a

At the end of a five-year life, a company will dispose of an asset and recognize a gain of $6,000. If the company\'s cost of capital is 15 percent and its tax rate is 30 percent, what is the present value of the future cash flow?

a. $14,078

b. $6,000

c. $2,087

d. $895

Solution

Present value of the future cash flow FV×(1÷(1+r)^n) Here, A rate per annum 15.00% B Number of years                                       5 C Number of compoundings per per annum                                       1 A÷C rate per period ( r) 15.00% B×C Number of periods (n)                                       5 Cash flows value in 2 years (FV) $                           4,200 =6000*(1-30%) Present value of the future cash flow $               2,087 4200×(1÷(1+15%)^5)