Question

(Present value of an uneven stream of payments) You are given three investment alternatives to analyze. The cash flows from these three investments are as follows:

Investment
End of Year	A	B	C
1	$1,000	$2,000	$5,000
2	2,000	2,000	5,000
3	3,000	2,000	(5,000)
4	(4,000)	2,000	(5,000)
5	4,000	5,000	15,000

 What is the present value of each of these three investments if the appropriate discount rate is 11 percent?

Answer 1

Present value=Cash flows*Present value of discounting factor(rate%,time period)

A:

Present value=1000/1.11+2000/1.11^2+3000/1.11^3-4000/1.11^4+4000/1.11^5

=$4456.60(Approx)

B:

Present value=2000/1.11+2000/1.11^2+2000/1.11^3+2000/1.11^4+5000/1.11^5

=$9172.15(Approx)

C:

Present value=5000/1.11+5000/1.11^2-5000/1.11^3-5000/1.11^4+15000/1.11^5

=$10514.77(Approx).