Question

Buestion . .. What is the present value of the following set of cash flows, discounted at 100% per year? Year CI 1 $10 522 4 565 5 b. What is the present of the following set of cash flows, discounted at 100% per year? Year CF 1 558 2 5-46 531 4 522 590 5 510 c. Each set contains the same cash flow (510, 522 54 546 558)so why is the present value different? .. What is the present value of the following cash flows, discounted at 100% per year? Year CH 1 $10 2 4 31 5 558 The per value of the cash low streams Round to the rest cont

Answer 1

a.Present value=Cash flows*Present value of discounting factor(rate%,time period)

=10/1.108+22/1.108^2+34/1.108^3+46/1.108^4+58/1.108^5

=$117.19(Approx)

b.Present value=Cash flows*Present value of discounting factor(rate%,time period)

=58/1.108+46/1.108^2+34/1.108^3+22/1.108^4+10/1.108^5

=$135.4(Approx)

c.Present value of cash flows is different because of timing of cash flows ie the year in which such cash flows are arising.Given the discount rate;present value of $10 occurring at t=1 would not be the same as present value of $10 occurring at t=5.Higher the time period lower would be the present value of cash flow and vice-versa.

It is to be noted that if the discount rate would have been 0% the present value under both cases would have been same