Question

Present value of an uneven stream of payments ) You are given three investment alternatives to analyze. The cash flows from these three investments are as follows: Investment End of Year

End of Year   A   B   C
1   $3,000   $1,000   $5,000
2   4,000   1,000   5,000
3   5,000   1,000   (5,000)
4   -6,000   1,000   (5,000)
5   6,000   5,000   15,000

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

14percent?

Answer 1

Present value = Sum of all future cash inflows discounted to present value using discount rate = C / (1+r)^n, where C is cash flow, r is discount rate and n = number of periods

Present value of A:

= 3,000 / (1+14%) + 4000 / (1+14%)^2 + 5000 /(1+14%)^3 - 6000 / (1+14%)^4 + 6000 / (1+14%)^5

= $8,648.03

Present value of B:

= 1,000 / (1+14%) + 1000 / (1+14%)^2 + 1000 /(1+14%)^3 + 1000 / (1+14%)^4 + 5000 / (1+14%)^5

=$5,510.56

Present value of C:

= 5,000 / (1+14%) + 5000 / (1+14%)^2 - 5000 /(1+14%)^3 - 5000 / (1+14%)^4 + 15000 / (1+14%)^5

=$9,688.57