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3 years ago

A. Find the present values of the following cash flow streams. The appropriate interest rate is 9%.

Business

1 answer:

Evgen [1.6K]3 years ago

7 0

Answer:

PV - Stream A = $1215.638009 rounded off to $1215.64

PV - Stream B = $1269.13797 rounded off to $1269.14

PV - Stream A = $1600

PV - Stream B = $1600

Explanation:

The present value of a series or stream of cash flows can be calculated using the following formula,

PV of Cash flow = CF1 / (1+i) + CF2 / (1+i)^2 + ... + CFn / (1+i)^n

Where,

CF1, CF2, ... represents the cash flow in year 1, year 2 and so on
i is the relevant discount rate or interest rate

PV - Stream A = 100 / (1+0.09) + 400 / (1+0.09)^2 + 400 / (1+0.09)^3 +

400 / (1+0.09)^4 + 300 / (1+0.09)^5

PV - Stream A = $1215.638009 rounded off to $1215.64

PV - Stream B = 300 / (1+0.09) + 400 / (1+0.09)^2 + 400 / (1+0.09)^3 +

400 / (1+0.09)^4 + 100 / (1+0.09)^5

PV - Stream B = $1269.13797 rounded off to $1269.14

When the interest rate is zero, the present value of cash flows remain the same as their absolute values. Thus, the PV of cash flow streams A and B at 0% interest rate is,

PV - Stream A = 100 + 400 + 400 + 400 + 300

PV - Stream A = $1600

PV - Stream B = 300 + 400 + 400 + 400 + 100

PV - Stream B = $1600

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