Uneven Cash Flow Stream a. Find the present values of the following cash flow st

Question

Uneven Cash Flow Stream a. Find the present values of the following cash flow streams. The appropriate interest rate is 6%. Round your answers to the nearest cent. (Hint: It is fairly easy to work this problem dealing with the individual cash flows. However, if you have a financial calculator, read the section of the manual that describes how to enter cash flows such as the ones in this problem. This will take a little time, but the investment will pay huge dividends throughout the course. Note that, when working with the calculator's cash flow register, you must enter CF0-0. Note also that it is quite easy to work the problem with Excel, using procedures described in the Chapter 4 Tool Kit.) Year Cash Stream A $100 400 400 400 300 Cash Stream B $300 400 400 400 100 4 Stream A $ Stream B$ b. What is the value of each cash flow stream at a 0% interest rate? Round your answers to the nearest cent. Stream A$ Stream B$

Explanation / Answer

Present Value (PV) = present value of money to be received in future.

Formula to calculate PV = Future Cash Flow / (1 + Interest Rate) ^No. of years

We can calculate the factor [(1 + Interest Rate) ^ No of Years] to make calculation easy for 5 years @ 6 percent as below

Answer (A)

Present Value of cash Stream A

Present Value of Cash Stream B

Answer (B)

Difference between future value and present value of cash flow arises due to interest rate factor if interest rate is zero than the future value and present value of cash flow will be same, can understand by calculating factor for 0% interest rate as below

Factor = (1 + 0) ^1 = 1,

= (1 + 0)^2 = 1

So in every condition factor will be 1 that will reflect the present value same as future value.So, at the 0% rate the present vale will be

Stream A = (100 +400+400+400+300) = $1600

Stream B = (300+400+400+400+100) = $1600

So this is the solution to the problem.

Year 1 (1 + 0.06)^1 1.06^1 1.0600 Year2 (1 + 0.06)^2 1.06^2 1.1236 Year3 (1 + 0.06)^3 1.06^3 1.1910 Year4 (1 + 0.06)^4 1.06^4 1.2624 Year5 (1 + 0.06)^5 1.06^5 1.3382

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