Question

a. Find the valte of each steam usng a 7% discount tate discuss them in light of thie undiscounted cash flows totaling $60,000 in each case. Is thore some discount rate af which the present values of the two streams would be equal? Data Table (Click on the icon S- 45,000 $37,500 $22.500 $30,000 $22,500 $37 500 $15,000 $-45,000 Enter Totals $80,000 6000 2 Activity Details You have viewed this topic 으 o search

Answer 1

Part A

Cash flow stream	Year (t)	CFt * (1+0.07)^-t	Present value
A	0	-45000 * 1.000	-45000
	1	37500 * 0.93458	35047
	2	30000 * 0.87344	26203
	3	22500 * 0.81630	18367
	4	15000 * 0.76290	11444
			$46061
Cash flow stream	Year (t)	CFt * (1+0.07)^-t	Present value
B	0	15000 * 1.000	15000
	1	22500 * 0.93458	21028
	2	30000 * 0.87344	26203
	3	37500 * 0.81630	30611
	4	-45000 * 0.76290	-34331
			$58512

Part B

Compare to cash flow stream A, Cash flow stream B has a higher present value due to larger cash flows in the early years when their present value is greater, on the other hand the smaller cash flows are received further in the future. Although both cash flow streams total $60,000 on an undiscounted basis, the large early-year cash flows of stream B result in i