Question

eBook Problem Walk-Through a. Find the present values of the following cash flow streams at a 3% discount rate. Do not round intermediate calculations. Round your answers to the nearest cent. 0 1 2 3 4 + Stream A $0 $100 $400 $400 $400 $250 Stream B $0 $250 $400 $400 $400 $100 Stream A: $ Stream B: $ b. What are the PVs of the streams at a 0% discount rate? Round your answers to the pearest dollar Stream A: $ Stream B: $ Grade it Now Save & Continue Continue without saving

Answer 1

a.
Calculate present value for stream A cash flow with discount rate of 3%
Year	Cash flow	Discount factor @ 3%		Present value
0	$0	1.0000	1/(1.03^0)	$0.00
1	$100	0.9709	1/(1.03^1)	$97.09
2	$400	0.9426	1/(1.03^2)	$377.04
3	$400	0.9151	1/(1.03^3)	$366.06
4	$400	0.8885	1/(1.03^4)	$355.39
5	$250	0.8626	1/(1.03^5)	$215.65
Total				$1,411.23
Thus, present value for stream A cash flow is $1,411.23
Calculate present value for stream B cash flow with discount rate of 3%
Year	Cash flow	Discount factor @ 3%		Present value
0	$0	1.0000	1/(1.03^0)	$0.00
1	$250	0.9709	1/(1.03^1)	$242.72
2	$400	0.9426	1/(1.03^2)	$377.04
3	$400	0.9151	1/(1.03^3)	$366.06
4	$400	0.8885	1/(1.03^4)	$355.39
5	$100	0.8626	1/(1.03^5)	$86.26
Total				$1,427.47
Thus, present value for stream B cash flow is $1,427.47
b.
If discount rate is 0% then present value would be equal to cash flow
Present value of stream A cash flow
Year	Cash flow
0	$0
1	$100
2	$400
3	$400
4	$400
5	$250
Total	$1,550
Thus, present value of Stream A cash flow is $1,550
Present value of stream B cash flow
Year	Cash flow
0	$0
1	$250
2	$400
3	$400
4	$400
5	$100
Total	$1,550
Thus, present value of Stream B cash flow is $1,550