Question

1. Find the present values of the following cash flow streams. The appropriate interest rate is 12%. (Hint: It is fairly easy to work this problem dealing with the individual cash flows. However, if you have a financial calculator, read the section of the manual that describes how to enter cash flows such as the ones in this problem. This will take a little time, but the investment will pay huge dividends throughout the course. Note that, when working with the calculator's cash flow register, you must enter CF₀ = 0. Note also that it is quite easy to work the problem with Excel, using procedures described in the Ch04 Tool Kit.xlsx.) Do not round intermediate calculations. Round your answers to the nearest cent.

   Year	Cash Stream A	Cash Stream B
   1	$100	$200
   2	400	400
   3	400	400
   4	400	400
   5	200	100

   Stream A: $  

   Stream B: $  

2. What is the value of each cash flow stream at a 0% interest rate? Round your answers to the nearest dollar.

   Stream A $  

   Stream B $  

Answer 1

The present value is computed as shown below:

= Future value / (1 + r)ⁿ

a. The present value of stream A is computed as follows:

= $ 100 / 1.12 + $ 400 / 1.12² + $ 400 / 1.12³ + $ 400 / 1.12⁴ + $ 200 / 1.12⁵

= $ 1,060.57 Approximately

The present value of stream B is computed as follows:

= $ 200 / 1.12 + $ 400 / 1.12² + $ 400 / 1.12³ + $ 400 / 1.12⁴ + $ 100 / 1.12⁵

= $ 1,093.11 Approximately

b. The present value of stream A is computed as follows:

= $ 100 + $ 400 + $ 400 + $ 400 + $ 200

= $ 1,500

The present value of stream B is computed as follows:

= $ 100 + $ 400 + $ 400 + $ 400 + $ 200

= $ 1,500

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