Chapter 5, Problem 18P

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Chapter
Section

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

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.

Summary Introduction

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.

Explanation

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 (BĆC) Stream B (BĆ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

DiscountāRate=ā1(1+Interestārate)Numberāofāyears=1(1+0.05)1=0.952381

Formula to calculate discounting rate for year 2

DiscountāRate=ā1(1+Interestārate)Numberāofāyears=1(1+0

b.

Summary Introduction

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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