Question

Relationship between future value and present value: Mixed stream. Using the information in the accompanying table, answer the questions that follow.

Year	Cash Flow
0	0
1	800
2	900
3	1000
4	1500
5	2000

a.Determine the present value of the mixed stream of cash flows, using a 5% discount rate.

b. Suppose you had a lump sum equal to your answer in part a on hand today. If you invested this sum for 5 years and earned a 5% return each year, how much would you have after 5 years?

c. Determine the future value 5 years from now of the mixed stream, using a 5% interest rate. Compare your answer here to your answers in part b.

d. How much would you be willing to pay for this stream, assuming that you can at best earn 5% on your investments?

Answer 1

Answer (a):

Present value of the mixed stream of cash flows = 5,243.17

Working:

Answer (b):

Amount you would have after 5 years = 6,691.77

Working:

FV = PV * (1 + r) ^{Number of years}

= 5243.1749 * (1 + 5%) ⁵

= 6,691.77

Answer (c):

Future value 5 years from now of the mixed stream = 6,691.77

This value is same as answer in part b

Answer (d):

Amount you would be willing to pay for this stream, assuming that you can at best earn 5% = Present value = 5,243.17