Answer:
1 Purple Lion Beverage Company
Year Cash flows($) Dfc (6.5%) Present Value($)
1 250,000 0.9389 234,741.78
2 37,500 0.8817 33,062.22
3 180,000 0.8278 149,012.84
4 300,000 0.7773 233,196.93
5 550,000 0.7299 401,434.46
Total Present value = 1,051,448.23 (D)
2) Annuity Payment - You recently moved to a new apartment and signed a contract to pay monthly rent to your landlord for a year.
Uneven Cash flow - SOE Corp. hires an average of 10 people every year and matches the contribution of each employee toward his or her retirement fund.
Uneven Cash flow - Franklinia Venture Capital (FVC) invested in a budding entrepreneur’s restaurant. The restaurant owner promises to pay FVC 10% of the profit each month for the next 10 years.
Annuity Payment - You have committed to deposit $600 in a fixed interest–bearing account every quarter for four years.
Explanation:
1) Dfc i.e. discount factor is calculated by - 1 / (1 + r)ⁿ
where r is the rate at 6.5%
and n is the time period - 1,2,3,4,5
for year 1 = 1 / (1 + 0.065)¹ = 1/1.065 = 0.9389
for year 2 = 1 / (1 + 0.065)² = 1/1.1342 = 0.8817
for year 3 = 1 / (1 + 0.065)³ = 1/1.2079 = 0.8278
for year 4 = 1 / (1 + 0.065)⁴ = 1/1.2865 = 0.7773
for year 5 = 1 / (1 + 0.065)⁵ = 1/1.3701 = 0.7299
while Present value is gotten by multiplying annual cash flow by the discount factor
2) a) Monthly rental payment is normally for the same amount i.e it is an annuity payment
b) The contribution of each employee would vary and not always be the same and as such it would be an uneven cash flow
c) The profit from the restaurant would not always be the same for every month and as such the payment of 10% on profit would also vary per month
d) The deposit of $600 is for a fixed amount and such is an annuity payment
Note: an annuity is a fixed payment made at equal intervals while uneven cash flows as cash flows that vary with amount paid
