Calculate the present value of each cashflow using a discount rate of 7%. Which do you most prefer most?
Show and explain all supporting calculations!
Cashflow A: receive $60 today and then receive $60 in four years.
Cashflow B: receive $12 every year, forever, starting today.
Cashflow C: pay $50 every year for five years, with the first payment being next year, and then subsequently receive $30 every year for 20 years.
Cashflow D: receive $9 every other year, forever, with the first payment being next year.
Ans-A- PV= 60+60/ (1+0.07)^4
=60+60/1.310796
=60+45.77371
=$105.77
B- PV of perpetuity= 12+12/0.07
=12+171.43
=$183.43
C-PV= -50* PV factor of annuity @7%, n= 5+(30*PV factor of annuity @7% for 20 years)* PV factor @ 7% for 5 years
=-50/0.07*(1-1.07^-5)+ 30/0.07*(1-1.07^-20)*1.07^-5
=$21.59
D-PV of perpetuity= 9/(1.07^2-1)*1.07
=$66.46
The PV of cashflow B is largest and should be most preferred.
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