Question

The following are the mixed stream of cash flows for project A and project B:

Cash flow stream (in rands)
Year	A	B
1	50 000	10 000
2	45 000	25 000
3	35 000	35 000
4	25 000	45 000
5	10 000	50 000
Totals	165 000	165 000

Required:

5.1. Find the present value of each stream, using a 12% discount rate. [6]

5.2. Compare the calculated present values and discuss them in the context of their total discounted cash flows amount relative to R165 000 in each case. [4]

Answer 1

Answer 5.1:-

Following is the excel sheet showing the calculations of present value of cash flow stream of A and B:-

Following is the formula sheet of above excel worksheet for easy understanding of the calculations:-

Answer 5.2:-

Present value of cash flow stream of A is more than the cash flow stream of B as the present value of cash flow stream of A is $126991.11 and that of cash stream of B is $ 110740.38 in comparison to their future value of $165000. This is because of the fact that cash flows in case of project A are higher in initial years than in later years and cash flows in case of project B are more in later years as compared to initial years. The present value factor in initial years are higher as compared to later years and this is the reason why higher cash flows in initial years result in higher present value. This is the reason why the present value of cash flow stream of project A is higher in initial years and cash flow stream of project B is lower in initial years, which had ultimately resulted in higher present value for project A and lower for project B.