Answer:
a. The present value of Cash flow stream A at 10% interest rate is $1,181.50; while the present value of Cash flow streams B at 10% interest rate is $1,239.13.
b. Present value of Cash flow streams A and B at 0% interest rate are both equal to $1,600.
Explanation:
a. Calculations of the present values of Cash Flow Stream A and B at 10% interest rate
The present value (PV) for a particular year can be calculated using the following formula:
PV = FV / (1 + r)^n
Where:
PV = present value of a particular year
FV = Future value or cash stream of a particular year
r = interest rate = 10%
n = The particular year in focus
The present value of cash flow streams at a particular interest rate is the sum of the present values of Cash Stream for all years, and this can be calculated as follows:
Present value of Cash flow stream A at 10% interest rate = (100 / (1 + 10%)^1) + (400 / (1 + 10%)^2) + (400 / (1 + 10%)^3) + (400 / (1 + 10%)^4) + (300 / (1 + 10%)^5) = $1,181.50
Present value of Cash flow streams B at 10% interest rate = (300 / (1 + 10%)^1) + (400 / (1 + 10%)^2) + (400 / (1 + 10%)^3) + (400 / (1 + 10%)^4) + (100 / (1 + 10%)^5) = $1,239.13
b. Calculations of the present values of Cash Flow Stream A and B at 0% interest rate
The present value of cash flow streams at a 0% is simply the sum of Cash Flow Stream for all years, and this can be calculated as follows:
Present value of Cash flow stream A at 0% interest rate = $100 + $400 + $400 + $400 + $300 = $1,600
Present value of Cash flow streams B at 0% interest rate = $300 + $400 + $400 + $400 + $100 = $1,600
