Question

Consider the following uneven cash flow stream

0	0
1	$250
2	$400
3	$500
4	$600
5	$600

What is the present (Year 0) value if the opportunity cost (discount) rate is 10%? Add an outflow (or cost) of $1,000 at Year 0. What is the present value of the cash flow stream?

Your oldest daughter is about to start kindergarten at a private school. Tuition is $10,000 per year payable at the beginning of the school year. You expect to keep your daughter in private school through high school. You expect tuition to increase at a rate of 5% per year over the 13 years of her schooling. What is the present value of the tuition payments if the discount rate is 6% per year?

Answer 1

Solution

a. Present value of a cashflow=Cashflow/(1+r)^n

where

r-intrest or discount rate per period=10%

n-number of discounting periods

Calculation for total present value for stream of cashflow given below

Excel formula

Thus Present value=$1715.869507

Now if an outflow of 1000 is added at the start of year 0

Calculation of Present value given below

Excel formula

Thus Present value in this case=$715.869507

b.

. Present value of a cashflow=Cashflow/(1+r)^n

where

r-intrest or discount rate per period=6%

n-number of discounting periods

Also here the cashflow is increasing by 5% per year

Calculation for the present value of tution payments is given below

Excel formula

Thus total present value of tution payment=$122890.1458

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