Question

Present value Mixed streams Consider the mixed streams of cash flows shown in the following​ table...

Present value Mixed streams Consider the mixed streams of cash flows shown in the following​ table

A B

1   $-15,000 $5,000
2   $12,500 $7,500
3   $10,000 $10,000
4   $7,500 $12,500
5   $5,000 $-15,000
Totals   $20,000   $20,000

a.  Find the present value of each stream using a 6​% discount rate.

b.  Compare the calculated present values and discuss them in light of the undiscounted cash flows totaling $20,000 in each case. Is there some discount rate at which the present values of the two streams would be​ equal?

Homework Answers

Answer #1

PV of A:

Year CF Discount Factor Discounted CF
1 $-15,000.00 1/(1+0.12)^1= 0.892857143 0.892857142857143*-15000= $ -13,392.86
2 $ 12,500.00 1/(1+0.12)^2= 0.797193878 0.79719387755102*12500= $     9,964.92
3 $ 10,000.00 1/(1+0.12)^3= 0.711780248 0.711780247813411*10000= $     7,117.80
4 $    7,500.00 1/(1+0.12)^4= 0.635518078 0.635518078404831*7500= $     4,766.39
5 $    5,000.00 1/(1+0.12)^5= 0.567426856 0.567426855718599*5000= $     2,837.13
NPV = Sum of all Discounted CF $   11,293.39

PV of B

Year CF Discount Factor Discounted CF
1 $    5,000.00 1/(1+0.12)^1= 0.892857143 0.892857142857143*5000=         4,464.29
2 $    7,500.00 1/(1+0.12)^2= 0.797193878 0.79719387755102*7500=         5,978.95
3 $ 10,000.00 1/(1+0.12)^3= 0.711780248 0.711780247813411*10000=         7,117.80
4 $ 12,500.00 1/(1+0.12)^4= 0.635518078 0.635518078404831*12500=         7,943.98
5 $-15,000.00 1/(1+0.12)^5= 0.567426856 0.567426855718599*-15000=        -8,511.40
NPV = Sum of all Discounted CF       16,993.62

To find the rate at which the NPV of the two projects will be equal, we need to calculate the IRR for the incremental CFs.

IRR is the rate at which NPV = 0
IRR can be calculated using either a financial calculator or excel or through hit and trial:
At IRR NPV of incremental CFs will equal 0 which implies that the NPV of both the streams is equal

Incremental CFs are

Year CF
1 -15000-5000 = $-20,000.00
2 12500-7500 = $    5,000.00
3 10000-10000 = $                 -  
4 7500 - 12500 = $   -5,000.00
5 5000-(-15000) = $ 20,000.00

As there are multiple sign changes there is no IRR for the project. So there is no rate at which the NPV of the two streams can be equal

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Present value - Mixed streams???Consider the mixed streams of cash flows shown in the following? table:...
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=...
Value of a mixed stream   For the mixed stream of cash flows shown in the following​...
Value of a mixed stream   For the mixed stream of cash flows shown in the following​ table, determine the future value at the end of the final year if deposits are made into an account paying annual interest of 15​%, assuming that no withdrawals are made during the period and that the deposits are​ made: a. At the end of each year. b. At the beginning of each year. Cash flow stream 1 ​$36,600 2 ​$30,500 3 ​$24,400 4 ​$12,200...
1a) What is the present value PV of the following streams of cash flows (CFs), if...
1a) What is the present value PV of the following streams of cash flows (CFs), if the discount rate is 7% of a stream of 10 CFs. The first CF starts next year and is equal to $2,000. Then the next 5 CFs grow at 15% (over the prior year). The next 2 CFs are $0; the last 2 CFs are equal to $21,000. 1b) You will need $2,000,000 when you retire in 30 years from today. You are planning...
UNEVEN CASH FLOW STREAM Find the present values of the following cash flow streams at a...
UNEVEN CASH FLOW STREAM Find the present values of the following cash flow streams at a 6% discount rate. Round your answers to the nearest cent. 0 1 2 3 4 5 Stream A $0 $100 $450 $450 $450 $300 Stream B $0 $300 $450 $450 $450 $100 Stream A $   Stream B $   What are the PVs of the streams at a 0% discount rate? Stream A $   Stream B $  
A. Find the present values of the following cash flow streams at a 9% discount rate....
A. Find the present values of the following cash flow streams at a 9% discount rate. Round your answers to the nearest cent. Stream A $0 $100 $350 $350 $350 $300 Stream B $0 $300 $350 $350 $350 $100 Stream A $   Stream B $ B. What are the PVs of the streams at a 0% discount rate? Stream A $   Stream B $
Find the present values of the following cash flow streams at a 5% discount rate. Round...
Find the present values of the following cash flow streams at a 5% discount rate. Round your answers to the nearest cent. 0 1 2 3 4 5 Stream A $0 $150 $350 $350 $350 $300 Stream B $0 $300 $350 $350 $350 $150 Stream A $   Stream B $   What are the PVs of the streams at a 0% discount rate? Stream A $   Stream B $  
Find the present values of the following cash flow streams at a 10% discount rate. Round...
Find the present values of the following cash flow streams at a 10% discount rate. Round your answers to the nearest cent. 0 1 2 3 4 5 Stream A $0 $150 $350 $350 $350 $300 Stream B $0 $300 $350 $350 $350 $150 Stream A $ Stream B $ What are the PVs of the streams at a 0% discount rate? Stream A $ Stream B $
Find the present values of the following cash flow streams at a 6% discount rate. Round...
Find the present values of the following cash flow streams at a 6% discount rate. Round your answers to the nearest cent. 0 1 2 3 4 5 Stream A $0 $100 $450 $450 $450 $250 Stream B $0 $250 $450 $450 $450 $100 Stream A $ Stream B $ What are the PVs of the streams at a 0% discount rate? Stream A $ Stream B $
Find the present values of the following cash flow streams at an 8% discount rate. Do...
Find the present values of the following cash flow streams at an 8% discount rate. Do not round intermediate calculations. Round your answers to the nearest cent. 0 1 2 3 4 5 Stream A $0 $150 $350 $350 $350 $300 Stream B $0 $300 $350 $350 $350 $150 Stream A: $   Stream B: $   What are the PVs of the streams at a 0% discount rate? Round your answers to the nearest dollar. Stream A: $   Stream B: $  
Find the present values of the following cash flow streams at a 6% discount rate. Do...
Find the present values of the following cash flow streams at a 6% discount rate. Do not round intermediate calculations. Round your answers to the nearest cent. 0 1 2 3 4 5 Stream A $0 $150 $400 $400 $400 $250 Stream B $0 $250 $400 $400 $400 $150 Stream A $   Stream B $   What are the PVs of the streams at a 0% discount rate? Round your answers to the nearest dollar. Stream A $   Stream B $