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1) A series of cash flows may not always necessarily be an annuity. Cash flows can...

1) A series of cash flows may not always necessarily be an annuity. Cash flows can also be uneven and variable in amount, but the concept of the time value of money will continue to apply.

Consider the following case:

The Purple Lion Beverage Company expects the following cash flows from its manufacturing plant in Palau over the next five years:

Annual Cash Flows

Year 1

Year 2

Year 3

Year 4

Year 5
$100,000 $20,000 $480,000 $450,000 $550,000

The CFO of the company believes that an appropriate annual interest rate on this investment is 9%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar?

A. $1,825,000

B. $1,155,478

C. $600,000

D. $2,325,000

Solutions

Expert Solution

Answer: Option (B)

Year Cashflows PVF@ 9% PV
1 $       100,000 0.9174 $                   91,743
2 $         20,000 0.8417 $                   16,834
3 $       480,000 0.7722 $                 370,648
4 $       450,000 0.7084 $                 318,791
5 $       550,000 0.6499 $                 357,462
PV of Cash Flows $             1,155,478

PVF(i%, nYear) = 1/(1+i)^n

jeff jeffy answered 2 years ago
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