Question

A series of cash flows may not always necessarily be an annuity. Cash flows can also be uneven and variable in amount, but the concept of the time value of money will continue to apply Consider the following case: The Purple Lion Beverage Company expects the following cash flows from its manufacturing plant in Palau over the next four years: Annual Cash Flows Year 1 Year 2 Year 3 Year 4 $250,000 $20,000 $330,000 $300,000 The CFO of the company believes that an appropriate annual interest rate on this investment is 9%. what is the present value of this uneven cash flow stream, rounded to the nearest whole dollar? $713,541 O $2,175,000 $1,825,000 O $600,000 Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments: Annuity Payments Uneven Description Cash Flows Shania bought a new dress for her brother's wedding for $450. She negotiated a deal with the retailer in which she would pay for the dress in three installments of $250, $100, and $100 over the next three months You signed up to make a monthly payment of $10 for one year for a lifetime tosubscription to your favorite magazine British consols are British government bonds that promise to make payments of a specified amount at regular intervals to the bearer forever You receive interest earnings from variable deposits in a regular interest-bearing savings account.

Answer 1

1

Discount rate	9.000%
Year	0	1	2	3	4
Cash flow stream	0	250000	20000	330000	300000
Discounting factor	1.000	1.090	1.188	1.295	1.412
Discounted cash flows project	0.000	229357.798	16833.600	254820.548	212527.563
NPV = Sum of discounted cash flows
NPV Project =	713539.51
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

2

a - uneven cash flows

b - Annuity

c - annuity

d - uneven cash flows as deposit is variable