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

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 six years:

Annual Cash Flows

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6
$400,000 $37,500 $480,000 $450,000 $550,000 $375,000

The CFO of the company believes that an appropriate annual interest rate on this investment is 4%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar?

$917,500

$1,979,094

$1,775,000

$2,292,500

Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments:

Description

Uneven Cash Flows

Annuity Payments
You recently moved to a new apartment and signed a contract to pay monthly rent to your landlord for a year.
SOE Corp. hires an average of 10 people every year and matches the contribution of each employee toward his or her retirement fund.
Franklinia Venture Capital (FVC) invested in a budding entrepreneur’s restaurant. The restaurant owner promises to pay FVC 10% of the profit each month for the next 10 years.
You have committed to deposit $600 in a fixed interest–bearing account every quarter for four years.

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jeff jeffy answered 4 months ago
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