We would reinvest Rs 4,000 received at the end of the year I for 4 ye:vs at the rate of 6 per cent. Tile cash inflows in year 2 will be re-invested ‘for 3 years at 6 per cent, the cash inflows of year 3 for 2 years and so on. There win-be no reinvestment of cash. inflows received at the end of the fifth year. The total sum of these compounded cash inflows is then discounted back for 5 years at 10 per cent and compared with the present value of the cash outlays, that is. Rs 10,000 (in this case).
The PV of the terminal sum is given in Table 10.15
Now, we have to and out the present value of Rs 22,796. The discount rate would be the cost of capital, II (0.10). The sum of R.~.22,796 would be received at the end of year 5. Its present value = Rs 22,796 x 0.621 = R.. 14,156.3.