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 four years: Annual Cash Flows Year 1 Year 2 Year 3 Year 4 $250,000 $37,500 $180,000 $300,000 The CFO of the company believes that an appropriate annual interest rate on this investment is 6.5%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar? $650,014 $1,475,000 $467,500 $1,692,500 Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments: Description Uneven Cash Flows Annuity Payments You recently moved to a new apartment and signed a contract to pay monthly rent to your landlord for a year. SOE Corp. hires an average of 10 people every year and matches the contribution of each employee toward his or her retirement fund. 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. You have committed to deposit $600 in a fixed interest–bearing account every quarter for four years.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 9E: Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required:...

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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 four years:

Annual Cash Flows
Year 1	Year 2	Year 3	Year 4
$250,000	$37,500	$180,000	$300,000

The CFO of the company believes that an appropriate annual interest rate on this investment is 6.5%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar?

$650,014

$1,475,000

$467,500

$1,692,500

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

Description	Uneven Cash Flows	Annuity Payments
You recently moved to a new apartment and signed a contract to pay monthly rent to your landlord for a year.
SOE Corp. hires an average of 10 people every year and matches the contribution of each employee toward his or her retirement fund.
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.
You have committed to deposit $600 in a fixed interest–bearing account every quarter for four years.

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