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Fundamentals of Financial Manageme...

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

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

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

UNEVEN CASH FLOW STREAM

  1. a. Find the present values of the following cash flow streams at a 5% discount rate.

images

  1. 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

YearDiscounting Rate Cash Flows Present value of cash flows
Stream AStream B

Stream A

(B×C)

Stream B

(B×D)

ABCDEF
01.0000000000
10.952381150250142.8572238.0953
20.907029450450408.1631408.1631
3 0.863838450450 388.7271 388.7271
40.822702450450370.2159370.2159
50.783526250150195.8815117.5289
Present value for Stream A and Stream B1505.8451522.73

Table (1)

Working Note to calculate discounting rate

Formula to calculate discounting rate for year 1

DiscountRate=1(1+Interestrate)Numberofyears=1(1+0.05)1=0.952381

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.

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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