Question

Find the present values of the following cash flow streams. The appropriate interest rate is 7%. (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 Ch04 Tool Kit.xlsx.) Do not round intermediate calculations. Round your answers to the nearest cent. Year Cash Stream A Cash Stream B 1 $100 $200 2 400 400 3 400 400 4 400 400 5 200 100 Stream A: $ Stream B: $ What is the value of each cash flow stream at a 0% interest rate? Round your answers to the nearest dollar. Stream A $ Stream B $

Answer 1

Answer:

Present value         Discount rate 7%               Discount rate 0%

Cash stream A        $1,217.11                               $1,500

Cash stream B        $1,239.27                             $1,500

Explanation:

Since there is two cash stream i.e A and B and we have to find out the present value of each cash stream through a discount rate of 7% and 0%

The workings are shown in the attached spreadsheet

Plus the discount factor is computed by

= 1 ÷ (1 + rate) ^ years

For Year 1 = 1 ÷ 1.07^1 = 0.9345794393

For Year 2 = 1 ÷ 1.07^2 = 0.8734387283

and so on