Question

Consider a project with the following cash flows: Year 0: Cash flow = $500 Year 1:...

Consider a project with the following cash flows:

Year 0: Cash flow = $500

Year 1: Cash flow = $0

Year 2: Cash flow = -$500

If the current market rate of interest is 8% per year, compounded annually, what is the value of this stream of cash flows expressed in terms of dollars at year 1?  (Note: This does not ask for the value as of year 0, but rather, as of year 1.)

a. $0

b. $250

c. $133

d. $77

An annuity pays $12 per year for 100 years, with the first payment occurring in one year. What is the present value (P) of this annuity given that the discount rate is 8%?

  1. $146.63
  2. $151.45
  3. $149.93
  4. $144.62
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Homework Answers

Answer #1

Q-1)

Calculating the Value of Stream of cashflow at year 1:-

Value of cashflow at Year1 = CF0(1+r)^1 + CF2/(1+r)^1

where, CF0 = Cash flow in Year 0= $500

CF2 = Cash flow in Year 2= -$500

r = Interest rate = 8%

Value of cashflow at Year1 = $500*(1+0.08)^1 + [-$500/(1+0.08)^1]

Value of cashflow at Year1 = $540 - $462.96

Value of cashflow at Year1 = $77

Option D

Q-2)

calculating the Present Value of Annuity:-

Where, C= Periodic Annuity Payments = $12

r = Periodic Interest rate =8%

n= no of periods = 100

Present Value = $149.93

Option 3

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