Question

Draw a time line of the following three cash flow streams.

Stream A has cash flows of -100, 90, 186, 85, and 200 in years 0 through 4.

Stream B is an annuity with cash flows of $100 for three years.

Stream C is a perpetuity with a constant cash flow of $80.

Compare the cash flows of the three cash flow streams. Identify the cash flow stream pays the most at year two and record this NUMBER.

Answer 1

=> First we will draw the time line for three cash flow streams.

Note: Annuity payments are equal payments for a specific time period and perpetuity payments are equal payments forever ( that means time period is infinity).

=> Now we move to the second part

* At year 2, we can see that Stream A pays $ 186, Stream B pays $ 100 and Stream C pays $ 80.

* Therefore, the cash flow stream that pays the most at year 2 is Stream A.