. Consider another set of net cash flow Year Cash Flow 0 $2,000 1 2,000 2 0 3 1,
ID: 2690225 • Letter: #
Question
. Consider another set of net cash flow Year Cash Flow 0 $2,000 1 2,000 2 0 3 1,500 4 2,500 5 4,000 a. What is the net present value of the stream if the opportunity cost of capital is 10%? b. What is the value of the stream at the end of Year 5 if the cash flows are invested in an account that pays 10% annually?? c. What cash flow today (Year 0), in lieu of the $2,000 cash flow, would be needed to accumulate $20,000 at the end of Year 5?? (Assume that the cash flows for Year 1 through 5 remain the same.)Explanation / Answer
a.
NPV = 2000 + 2000/1.1 + 0 + 1500/1.1^3 + 2500/1.1^4 + 4000/1.1^5
= $9,136.37
b.
value of the stream at the end of year 5 = 2000*1.1^4+ 0 + 1500*1.1^2 + 2500*1.1 + 4000
= $14,714.22
c.
in lieu of $2,000 cash flow:
let the cash flow from year 1 to 5 be constant at $2000
and in year 0 cash flow is y
so y*(1.1)^5 + 2000*1.1^4 + 2000*1.1^3 + 2000*1.1^2 + 2000*1.1 + 2000 = 20,000
on calculating y = $4,836.85
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