Question

CENGAGE | MINDTAP Q se Assignment 04 - Time Value of Money The Purple Lion Beverage Company expects the following cash flows from its manufacturing plant in Palau over the next five years: Year 1 $100,000 Annual Cash Flows Year 2 Year 3 $37,500 $480,000 Year 4 $300,000 Year 5 $550,000 The CFO of the company believes that an appropriate annual interest rate on this investment is 6.5%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar? O 0 0 $1,675,000 $617,500 $2,192,500 $1,158,958 Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments: Uneven Cash Flows Annuity Payments Description Debbie has been donating 10% of her salary at the end of every year to charity for the last three years. Her salary increased by 15% every year in the last three years. You deposit a certain equal amount of money every year into your pension fund. Amit receives quarterly dividends from his investment in a high-dividend yield, index exchange-traded fund. Aakash borrowed some money from his friend to start a new business. He promises to pay his friend $2,650 every year for the next five years to pay off his loan along with interest.

Answer 1

Present Value of the uneven cash flow stream

Year	Annual Cash Flow ($)	Present Value factor at 6.50%	Present Value of Cash Flow ($)
1	1,00,000	0.9389671	93,897
2	37,500	0.8816593	33,062
3	4,80,000	0.8278491	3,97,368
4	3,00,000	0.7773231	2,33,197
5	5,50,000	0.7298808	4,01,434
TOTAL			1,158,958

“Hence, the Present Value of the uneven cash flow stream will be $1,158,958 “

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.

Description	Type of cash flow
Debbie has been donating 10% of her salary at the end of every year to charity for the last three years. Her salary increased by 15% every year in the last three years.	Uneven cash flows