Question

Question 6.12

You are given three investment alternatives to analyze. The cash flows from these three investments are as follows:

End of year A B C

1 2000 1000 4000

2 3000 1000 4000

3 4000 1000 (4000)

4 (5000) 1000 (4000)

5 5000 3000 14000

What is the present value of each of these three investments if the appropriate discount rate is 9 percent?

Answer 1

(a)-Present Value of the Income Stream-A

Year	Annual cash flows ($)	Present Value Factor (PVF) at 9.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	2,000	0.917431	1,834.86
2	3,000	0.841680	2,525.04
3	4,000	0.772183	3,088.73
4	-5,000	0.708425	-3,542.13
5	5,000	0.649931	3,249.66
TOTAL		7,156.17

“The Present Value of the Income Stream-A will be $7,156.17”

(b)-Present Value of the Income Stream-B

Year	Annual cash flows ($)	Present Value Factor (PVF) at 9.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	1,000	0.917431	917.43
2	1,000	0.841680	841.68
3	1,000	0.772183	772.18
4	1,000	0.708425	708.43
5	3,000	0.649931	1,949.79
TOTAL		5,189.51

“The Present Value of the Income Stream-B will be $5,189.51”

(c)-Present Value of the Income Stream-C

Year	Annual cash flows ($)	Present Value Factor (PVF) at 9.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	4,000	0.917431	3,669.72
2	4,000	0.841680	3,366.72
3	-4,000	0.772183	-3,088.73
4	-4,000	0.708425	-2,833.70
5	14,000	0.649931	9,099.04
TOTAL		10,213.05

“The Present Value of the Income Stream-C will be $10,213.05”

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.