Question

Below are the expected cash flows and interest rates for the next nine years. Cash flows will occur at the end of the nominated years.

Cash Flows				Interest Rates
Year 0				Years 1 - 2	8%
Year 1
Year 2		+$ 6,500
Year 3		+$ 1,500		Years 3 – 8	6%
Year 4
Year 5
Year 6		-$ 2,500
Year 7
Year 8
Year 9		+$ 10,000		Years 9 - 10	7%
Year 10
i.	Using the Table function within MS Word, draw a time line showing the above cash flows and interest rates .
ii.	What will be the value of all these cash flows at each of the following times: Time 1 Time 5 Time 10

Answer 1

	Cash Flows			Present Values	Interest Rates
	Year 0				Years 1 - 2	8%
	Year 1
	Year 2		$6,500	5572.70
	Year 3		$1,500	1259.43	Years 3 – 8	6%
	Year 4
	Year 5
	Year 6		($2,500)
	Year 7
	Year 8
	Year 9		$10,000	5439.34	Years 9 - 10	7%
	Year 10
	Value of all the cash flows at the end of
	Year 1	PV of CV9+CV6+CV3+CV2
		PV at year 1 forCV9 = $10,000/(1+0.07)^(9-1)		5820.09
		PV at year 1 for CV6 = -2,500/(1+0.06)^(6-1)		-1868.15
		PV at year1 for CV3 = 1500/(1+0.06)^(3-1)		1334.99
		PV at year1 for CV2 = 6500/(1+0.08)^1		6018.52
	Value of Cash flow at year1 is			11305.46
	Year 5
		PV at year 1 forCV9 = $10,000/(1+0.07)^(9-5)		7628.95
		PV at year 1 for CV6 = -2,500/(1+0.06)^(6-5)		-2358.49
	Value of Cash flow at year5 is			5270.46
	Year 10	At time 10 the
		There were no cash flows at year 10 and beyond
		therefore there is sero value of cash flows at Time 10