a.
To calculate: Present value of cash flow stream at 8% discounting rate.
Present value of cash flow: It is also called as discounted value, it defines that amount of money that is invested at a given rate of interest, which will further increase the amount of future cash flow at that particular time in future.
a.
Explanation of Solution
Solution:
Calculation of present value of cash flow stream at 8% discounting rate
Year | Discounting Rate | Cash Flows | Present value of cash flows | ||
Stream A | Stream B |
Stream A |
Stream B |
||
A | B | C | D | E | F |
0 | 1.000000 | 0 | 0 | 0 | 0 |
1 | 0.92592 | 100 | 300 | $92.592 | $277.77 |
2 | 0.85733 | 400 | 400 | $342.932 | $342.932 |
3 | 0.79383 | 400 | 400 | $317.532 | $317.532 |
4 | 0.73502 | 400 | 400 | $294.008 | $294.008 |
5 | 0.68058 | 300 | 100 | $204.174 | $68.058 |
Present value for Stream A and Stream B | $1248.23 | $1300.306 |
Table (1)
Working Note to calculate discounting rate
Formula to calculate discounting rate for year 1
Formula to calculate discounting rate for year 2
Formula to calculate discounting rate for year 3
Formula to calculate discounting rate for year 4
Formula to calculate discounting rate for year 5
Present value for stream A and stream B is $1248.23 and $1300.306 respectively.
b.
To calculate: Present value of cash flow stream at 0% discounting rate.
b.
Explanation of Solution
Solution:
Calculation of present value of cash flow stream at 0% discounting rate
Year | Discounting Rate | Cash Flows | Present value of cash flows | ||
Stream A | Stream B |
Stream A |
Stream B |
||
A | B | C | D | E | F |
0 | 1.000000 | 0 | 0 | 0 | 0 |
1 | 1.000000 | 100 | 300 | $100 | $300 |
2 | 1.000000 | 400 | 400 | $400 | $400 |
3 | 1.000000 | 400 | 400 | $400 |
$400 |
4 | 1.000000 | 400 | 400 | $400 | $400 |
5 | 1.000000 | 300 | 100 | $300 | $100 |
Present value for Stream A and Stream B | $1600 | $1600 |
Table (2)
Working Note to calculate discounting rate
Formula to calculate discounting rate for year 1
Formula to calculate discounting rate for year 2
Formula to calculate discounting rate for year 3
Formula to calculate discounting rate for year 4
Formula to calculate discounting rate for year 5
Present value for stream A and stream B is $1600 and $1600 respectively.
Want to see more full solutions like this?
Chapter 5 Solutions
Fundamentals of Financial Management: Concise - MindTap Access
- Which of the following discounts future cash flows to their present value at the expected rate of return, and compares that to the Initial Investment? A. internal rate of return (IRR) method B. net present value (N PV) C. discounted cash flow model D. future value methodarrow_forwardWhen using the NPV method for a particular investment decision, if the present value of all cash Inflows Is greater than the present value of all cash outflows, then _______ . A. the discount rate used was too high B. the investment provides an actual rate of return greater than the discount rate C. the investment provides an actual rate of return equal to the discount rate D. the discount rate is too lowarrow_forwardFind the present values of the following cash flow streams at a 9% discount rate. Do not round intermediate calculations. Round your answers to the nearest cent. 012345 Stream A$0$150$350$350$350$250Stream B$0$250$350$350$350$150 Stream A: $ Stream B: $ What are the PVs of the streams at a 0% discount rate? Round your answers to the nearest dollar. Stream A: $ Stream B: $arrow_forward
- Consider the following cash flows: Year Cash Flow 0 −$ 29,000 1 14,700 2 14,200 3 10,600 What is the profitability index for the cash flows if the relevant discount rate is 10 percent? Note: Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161. What is the profitability index if the discount rate is 15 percent? Note: Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161. What is the profitability index if the discount rate is 22 percent? Note: Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.arrow_forwardWhich of the following statements are correct? The internal rate of return (IRR) generated by a positive cash flow stream of n payments. (a)is always smaller or equal than +1 (b)is always given by the solution of a quadratic equation (c)is always bigger or equal than -1 (d)can be 17 for a suitable cashflow (e)can be -2 for a suitable cashflowarrow_forwardChoose the correct option- "This is the rate at which present value of cash inflows are equal to the present value of cash outflows". a. NPV b. IRR c. Payback periodarrow_forward
- Consider the following future value problem. The respective cash flows for t = 0, 1, 2, and 3 are $3,000, $2,000, $8,000, and $5,000 and the discount rate is ten percent. What is the future value at t = 4? do not use excelarrow_forwardSelect all the correct statements. The internal rate of return (IRR) generated by a positive cash flow stream of n payments a. is always given by the solution of a quadratic equation b. is always bigger or equal than -1 c. can be -2 for a suitable cashflow d. can be 17 for a suitable cashflow e. is always smaller or equal than +1arrow_forwardFind the present values of the following cash flow streams at a 3% discount rate. Do not round intermediate calculations. Round your answers to the nearest cent. 0 1 2 3 4 5 Stream A $0 $150 $400 $400 $400 $250 Stream B $0 $250 $400 $400 $400 $150arrow_forward
- Incremental cash flow is calculated as (cash flowB− cash flowA), where B represents the alternative with the larger initial investment. If the two cash flows were switched wherein B represents the one with the smaller initial investment, which alternative should be selected if the incremental rate of return is 20% and the MARR is 15%? Explain.arrow_forwardWhat is the net present value of the following set of cash flows at a discount rate of 5 percent? At 15percent? Multiple Choice $1, 018.47; -$628.30 $1,620.17: $2, 618.99 $1,620.17: $525.13 $722.09; - S1,708.16 $722.09: $418.05arrow_forwardThe cash flows for two alternatives X and Y are shown in the table displayed here. Year: 0 1 2 3 4 5 Alternative X: -$3,000 900 900 900 900 1,300 Alternative Y: -$5,000 1,400 1,400 1,400 1,400 2,100 Write an equation using appropriate compound-interest factors that could be used to solve for the incremental rate of return (ΔIRR) associated with these two alternatives. Do NOT solve this equation for ΔIRR.arrow_forward
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax CollegeIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning