Question

P5-31 Present value: Mixed streams Consider the mixed streams of cash flows shown in the following table. Year Cash flow stream B $-50,000 $10,000 40,000 20,000 30,000 30,000 20,000 40,000 10,000 -50,000 $150,000 $150,000 Totals 75% a. Find the present value of each stream using a 8% discount rate. b. Compare the calculated present values and discuss them in light of the undis- counted cash flows totaling $150,000 in each case.

there is no initial amount. Everything that you need is there, you do not need anything else.

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

А 1 $50,000 $40,000 $30,000 $20,000 $10,000 $10,000 $20,000 $30,000 $40,000 $50,000 5 Discount rate 5% 10 11 ТА Present value $134,104.67 В $125,663.93 12 a. 13 14 b. Present value of A is bigger than B, because A has bigger cash flows in initial periods. Both A and B has same undiscounted cash flow of $150,000 but present value of cash flow stream is different due to different spread of cash flows.

Cell reference -

А в Year В 50000 40000 30000 20000 10000 10000 20000 30000 40000 50000 Discount rate 0.05 10 11 A 12 a. Present value =NPV(C9,C3:07) =NPV(C9,D3:07) 13 14 b. Present value of A is bigger than B, because A has bigger cash flows in initial periods. Both A and B has same undiscounted cash flow of $150,000 but present value of cash flow stream is different due to different spread of cash flows. 15 16

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