00:01
So i don't know if part of this question got chopped off, but all we're being asked to do here is if the interest rate is 5%, what is the present value of the cash flow, right? and so present value means that we are adjusting future payments or future cash for lost interest.
00:21
The idea is that if you get money today, you can earn interest on it.
00:26
But if you get that money in the future, you can't earn interest on it until you have it, so it's worth less.
00:31
Right? so the present value here is based on two cash flows, right? in the first year, the cash flow is 25 ,000.
00:39
The second year, the cash flow is 30 ,000.
00:42
But that's greater than the present value, because those monies are not coming to us until the future.
00:46
We would rather have them today.
00:48
So how much would we settle for today? because with a smaller sum, we could earn interest, right? and the idea here is that in the first year, you lose the opportunity to earn interest one time...