Consider the following case: The Purple Lion Beverage Company expects the following cash flows from its manufacturing plant in Palau over the next six years: Annual Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 $400,000 $20,000 $180,000 $300,000 $350,000 $725,000 A. The CFO of the company believes that an appropriate annual interest rate on this investment is 9%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar? $1,975,000 $1,395,097 $1,775,000 $600,000 B. Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments: Description Uneven Cash Flows Annuity Payments Debbie has been donating 10% of her salary at the end of every year to charity for the last three years. Her salary increased by 15% every year in the last three years. You deposit a certain equal amount of money every year into your pension fund. Amit receives quarterly dividends from his investment in a high-dividend yield, index exchange–traded fund. Aakash borrowed some money from his friend to start a new business. He promises to pay his friend $2,650 every year for the next five years to pay off his loan along with interest.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter4: Time Value Of Money

Section: Chapter Questions

Problem 1MC

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11. 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 will continue to apply.

Consider the following case:

The Purple Lion Beverage Company expects the following cash flows from its manufacturing plant in Palau over the next six years:

Annual Cash Flows
Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
$400,000	$20,000	$180,000	$300,000	$350,000	$725,000

A. The CFO of the company believes that an appropriate annual interest rate on this investment is 9%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar?

$1,975,000

$1,395,097

$1,775,000

$600,000

B. Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments:

Description	Uneven Cash Flows	Annuity Payments
Debbie has been donating 10% of her salary at the end of every year to charity for the last three years. Her salary increased by 15% every year in the last three years.
You deposit a certain equal amount of money every year into your pension fund.
Amit receives quarterly dividends from his investment in a high-dividend yield, index exchange–traded fund.
Aakash borrowed some money from his friend to start a new business. He promises to pay his friend $2,650 every year for the next five years to pay off his loan along with interest.

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