Fundamentals of Financial Manageme...
Solutions
Fundamentals of Financial Manageme...
UNEVEN CASH FLOW STREAM
- a. Find the present values of the following cash flow streams at an 8% discount rate.
- b. What are the PVs of the streams at a 0% discount rate?
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.
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
b.
To calculate: Present value of cash flow stream at 0% discounting rate.
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