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 a 5% 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 5% discounting rate.
Present value of cash flow:
It is also called as discounted value. It defines that amount of money that invested at a given rate of interest will increases the amount of future cash flow at that particular time in future.
Calculation of present value of cash flow stream at 5% 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 | 0.952381 | 150 | 250 | 142.8572 | 238.0953 |
| 2 | 0.907029 | 450 | 450 | 408.1631 | 408.1631 |
| 3 | 0.863838 | 450 | 450 | 388.7271 | 388.7271 |
| 4 | 0.822702 | 450 | 450 | 370.2159 | 370.2159 |
| 5 | 0.783526 | 250 | 150 | 195.8815 | 117.5289 |
| Present value for Stream A and Stream B | 1505.845 | 1522.73 | |||
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.
Present value of cash flow:
It is also called as discounted value. It defines that amount of money that invested at a given rate of interest will increases the amount of future cash flow at that particular time in future.
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