Question

What is the present value of a constant stream of $5,000 monthly cash flows with

the first cash flow to be paid in 6 months, and the final cash flow to be paid in 32

months? Assume interest rates are 8% p.a. compounded monthly

$114,788

$102,777

$119,148

Answer 1

- Periodic monthly cash flow with the first cash flow to be paid in 6 months, and the final cash flow to be paid in 32 months is $5,000

firstly, Calculating the Present Value of these cash flow at time 6 months:-

Where, C= Periodic Payments = $5000

r = Periodic Interest rate = 8%/12 = 0.666%

n= no of periods = 27 payments (including 6th to 32th)

Present Value at (time = 6 months) is $123,994.17

Now, Calculating Present value today from PV 6 months:-

PV = PV 6 months/(1+r)^6

Where, PV 6 months = 123,994.17

r = Periodic Interest rate = 8%/12 = 0.666%

PV = $123,994.17/(1+0.00666)^6

PV = $123,994.17/1.04067262226

PV = $119,148.11

So, the present value of a constant stream of monthly cash flows is $119,148

Option 3

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