Question

Present value - Mixed streams???Consider the mixed streams of cash flows shown in the following? table:

a.??Find the present value of each stream using a 13?% discount rate.

b.??Compare the calculated present values and discuss them in light of the undiscounted cash flows totaling ?$125,000 in each case.

Cash flow stream

Year 1 ?A= $37,500 B= $12,500

Year 2 A= ?$31,250 B= $18,750

Year 3 A= $25,000 B= ?$25,000

Year 4 A?= $18,750 B= ?$31,250

Year 5 A= $12,500 B= $37,500

Totals= A= $125,000 B= $125,000

Answer 1

Present value of cash stream of Project A:

PV = 37,500/ (1.13)¹ + 31,250/ (1.13)² + 25,000/ (1.13)³ + 18,750/ (1.13)⁴ + 12,500/ (1.13)⁵

PV = 33,185.84 + 24,473.33 + 17,326.25 + 11,499.73 + 6,784.50

PV = 93,269.65

Present value of cash stream of Project B:

PV = 12,500/ (1.13)¹ + 18,750/ (1.13)² + 25,000/ (1.13)³ + 31,250/ (1.13)⁴ + 37,500/ (1.13)⁵

PV = 11,061.95 + 14,684.00 + 17,326.25 + 19,166.21 + 20,353.50

PV = 82,591.91

As we can see the cash stream of both he projects are equal, but unevenly distributed for both the projects.

In case of project B, the higher cash flows occur at later stage due to which they got heavly impacted beacuse of discounting.

Whereas, In project A the higher cash flows occur at beginning years due to which are not heavly impacted by discounting factor.