Question

UNEVEN CASH FLOW STREAM

a.)Find the present values of the following cash flow streams at a 4% discount rate. Round your answers to the nearest cent.

0

1

2

3

4

5

Stream A	$0	$100	$400	$400	$400	$250
Stream B	$0	$250	$400	$400	$400	$100

Stream A $ ________

Stream B $ ________

b.)What are the PVs of the streams at a 0% discount rate?

Stream A $ ________

Stream B $ ________

*Please show how to solve on TI:BA II PLUS calc. if applicable.

Answer 1

Net Present Value

The net cash flows are determined and they are discounted back to present values. The project with the highest net present value is selected.

Formula for computing net present value:

NPV=CF0+CF1/1+r)^1+ CF2/1+r)^2……+ CFn/1+r)^n= CFt/(1+r)^t

Where:

CF0= Initial cash investment

CFt= Cash flow in each year

r= Interest rate

This can also be calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0. Enter the initial cash flow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.
• Press CF ,2^nd and CLR Work to clear the memory. You can compute other present values questions now.

1.a.Stream A

• Press CF and enter a value of 0 for CF0. If there was a negative, it is entered as negative number. The initial cash flow is always entered as a negative number since it is a cash outflow.
• Press the down arrow button. CF1 will appear. Enter 100 and press enter. Press the down arrow again to input other cash flows till year5.
• Press the NPV button after the 5^th cash flow. Enter the discount rate 4. Press down arrow now. Press CPT to get the present value of $1,369.
• Press CF 2^nd and CLR Work to clear the memory. You can compute other present values questions now.

1.b. Repeat the above steps for calculating the present value for Stream B. The answer is $1,390.

2.a. Repeat the above steps for calculating the present value for Stream A. The only difference is that you need to input 0 as the interest rate. The answer is $1,550.

2.b. Repeat the above steps for calculating the present value for Stream B. The answer is $1,550.

I hope it was helped. If you have any doubts on this, kindly comment on the answer. I will be happy to help.