In: Finance
Find the present values of the following cash flow streams at an 8% discount rate. Round your answers to the nearest cent. 0 1 2 3 4 5 Stream A $0 $100 $350 $350 $350 $300 Stream B $0 $300 $350 $350 $350 $100 Stream A $ Stream B $ What are the PVs of the streams at a 0% discount rate? Stream A $ Stream B $
Answer>
Present Value of a cash flow is given by -
PV = CF / ((1+r)^n)
Where,
PV = Present value of the cash flow
CF = Cash flow
r = discount rate
n = number of years
Calculating PVs for stream A & B at 8% discount rate in excel using the above formula. Please refer to the below images:
As per the calculations above, clearly the PV of stream B is higher than stream A.
Now, The PVs when discount rate is 0%
As per the calculations above, the PV of stream B is equal to that of stream A.
Hope this answers your question.