   Chapter 5, Problem 18P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

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.

Summary Introduction

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.

Explanation

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 B×C Stream B B×D 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

DiscountRate=1(1+Interestrate)Numberofyears=1(1+0.08)1=0.92592

Formula to calculate discounting rate for year 2

DiscountRate=1(1+Interestrate)Numberofyears=1(1+0

b.

Summary Introduction

To calculate: Present value of cash flow stream at 0% discounting rate.

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