Problem #2. You are provided with the following four cash flows: Option A: $20,0

Question

Problem #2. You are provided with the following four cash flows: Option A: $20,000 received 5 years from now. Interest is compounded annually. Option B: $3,000 received at the end of each year for the next 5 years. Interest is compounded annually. Option C: $260 received at the end of each month for the next 5 years. Interest is compounded monthly. Option D: $5,000 received at the end of the first year, $4,000 received at the end of the second years, $3,000 received at the end of the third year, $2,000 received at the end of the fourth year, and $1,000 received at the end of the fifth and final year. Interest is compounded annually. Compute the Present Values of each of the four options at each of the following discount rates. Present your results for the following nominal annual discount rates in a concise, well-labeled table. a. Discount rate of money is 6% per year. b. Repeat for a discount rate of 10% per year. c. Repeat for a discount rate of 12% per year. d. Repeat for a discount rate of 14% per year.

Explanation / Answer

Lets assume that, PV = Present Value, C= Cash flow, discounted at r

PV(C7)    = C5 / (1+r)5 (5 years)

Cashflow Discount rate Present value C r 1+r (1+r)5 Calculation PV A $20,000.00 6% 1.06 1.338226 20000x1.3382255776 $ 26,764.51 B $30,000.00 10% 1.10 1.61051 30000x1.61051 $ 48,315.30 C $260.00 12% 1.12 1.762342 260x1.7623416 $       458.21 D (Cashflow are sum of all 5 years receivable) $15,000.00 14% 1.14 1.925415 15000x1.9254145824 $ 28,881.22

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