Question

A series of cash flows may not always necessarily be an annuity. Cash flows can also be uneven and variable in amount, but the concept of the time value of money will continue to apply.

Consider the following case:

The Purple Lion Beverage Company expects the following cash flows from its manufacturing plant in Palau over the next five years:

Annual Cash Flows
Year 1	Year 2	Year 3	Year 4	Year 5
$250,000	$37,500	$480,000	$300,000	$550,000

The CFO of the company believes that an appropriate annual interest rate on this investment is 4%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar?

$767,500

$1,650,000

$2,167,500

$1,410,275

Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments:

Description	Uneven Cash Flows	Annuity Payments
Debbie has been donating 10% of her salary at the end of every year to charity for the last three years. Her salary increased by 15% every year in the last three years.
You deposit a certain equal amount of money every year into your pension fund.
Amit receives quarterly dividends from his investment in a high-dividend yield, index exchange–traded fund.
Aakash borrowed some money from his friend to start a new business. He promises to pay his friend $2,650 every year for the next five years to pay off his loan along with interest.

Answer 1

The present value is computed as follows:

= Future value / (1 + r)ⁿ

So, the amount will be as follows:

= $ 250,000 / 1.04 + $ 37,500 / 1.04² + $ 480,000 / 1.04³ + $ 300,000 / 1.04⁴ + $ 550,000 / 1.04⁵

= $ 1,410,275

a. Uneven cash flow: Since the cash flows are not fixed.

b. Annuity payment: Since the cash flows are fixed.

c. Uneven cash flow: Since the cash flows are not fixed.

d. Annuity payment: Since the cash flows are fixed.

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