Uneven cash flows A series of cash flows may not always necessarily be an annuit
ID: 2732851 • Letter: U
Question
Uneven cash flows A series of cash flows may not always necessarily be an annuity. Cash flows can also be uneven and variable in amount, but the concept of the time value of money applies to uneven cash flows as well. Consider the following case: Anky Beverage Co. expects the following cash flows from its manufacturing plant in Palau over the next three years: Annual Cash Flows Year 1 Year 2 Year 3 $250,000 $20,000 $480,000 The CFO of the company believes that an appropriate annual interest rate on this investment is 4%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar? $685,594 $2,475,000 $750,000 $1,975,000 Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments: Description Uneven Cash Flows Annuity Payments Shania bought a new dress for her brother's wedding for $450. She negotiated a deal with the retailer in which she would pay for the dress in three installments of $250, $100, and $100 over the next three months You signed up to make a monthly payment of $10 for one year for a lifetime to subscription to your favorite magazine. British consols are British government bonds that promise to make payments of a specified amount at regular intervals to the bearer forever. You receive interest earnings from variable deposits in a regular interest-bearing savings account.Explanation / Answer
Calculation of present Value of Cashflows
Option A is correct answer.
Identifying the situations
Case 1:Uneven cashflows,payments made are uneven.
Case 2:Annuity payments,Equal monthly instalments were paid.
Case 3:Annuity Payments,Here specific amount is received.
Case 4:Uneven cash flows,since the deposits are variable,receipt is not fixed amount
Year Amount($) Present value factor @4% Present value($) 1 250000 0.96153 240384.62 2 20000 0.92455 18491.12 3 480000 0.88899 426718.25 750000 685593.99Related Questions
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