
For a given discount rate of r for n periods, the present value of a cashstream can be calculated as:
C+C1/(1+r)+C2/(1+r)^2+C3/(1+r)^3+....Cn/(1+r)^n; where C is cashflow in Year 0 and C1 to Cn are cashflows from Year 1 to Year n, and r is discount rate.
a).
Present Value of Stream A= 0+100/(1+9%)+450/(1+9%)^2+450/(1+9%)^3+450/(1+9%)^4+250/(1+9%)^5= $1299.26
Present Value of Stream B= 0+250/(1+9%)+450/(1+9%)^2+450/(1+9%)^3+450/(1+9%)^4+100/(1+9%)^5= $1339.38
b).
Present Value of Stream A= 0+100/(1+0%)+450/(1+0%)^2+450/(1+0%)^3+450/(1+0%)^4+250/(1+0%)^5= $1700
Present Value of Stream B= 0+250/(1+0%)+450/(1+0%)^2+450/(1+0%)^3+450/(1+0%)^4+100/(1+0%)^5= $1700
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