Question

Relationship between future value and present value long dash—Mixed stream. Using the information in the accompanying​ table, answer the questions that follow.

a. Determine the present value of the mixed stream of cash flows using a 55​% discount rate.

b. How much would you be willing to pay for an opportunity to buy this​ stream, assuming that you can at best earn 55​% on your​ investments?

c. What​ effect, if​ any, would a 77​% rather than a 55​% opportunity cost have on your​ analysis?

Year ​(t​)	Cash flow
1	​$700
2	​$1,000
3	​$1,000
4	​$1,600
5	​$1,900

Answer 1

a. Present Value = 700*PVF(55%,1 year) + 1,000*PVF(55%, 2 years) + 1,000*PVF(55%, 3 years) + 1,600*PVF(55%, 4 years) + 1,900*PVF(55%, 5 years)

= 700*0,645 + 1,000*0.416 1,000*0.269 + 1,600*0.173 + 1,900*0.112

= $1,626.1

b.Amount that should be paid = $1,626.1

c. A 77% return would decrease the present value of cash flows

= 700*0.565 + 1,000*0.319 + 1,000*0.180 + 1,600*0.102 + 1,900*0.058

= $1,167.9