Concept explainers
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
Bundle: Fundamentals of Financial Management, 14th + MindTap Finance, 1 term (6 months) Printed Access Card
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education