Hh1.Account 1. Consider another uneven cash flow stream:Year012345Cash Flow (RM)2,0002,00001,5002,5004,000a. What is the present (Year 0) value of the cash flow stream if theopportunity cost rate is 10 percent?b. What is the future (Year 5) value of the cash flow stream if the cashflows are invested in an account that pays 10 percent annually?c. What cash flow today (Year 0), in lieu of the RM2,000 cash flow, wouldbe needed to accumulate RM20,000 at the end of Year 5? (Assumethat the cash flows for Years 1 through 5 remain the same.)4

Present value of cash flow is current period value of a future sum. We can calculate the present…

Answered: 0 1 2 2,000 2,000

Business

Accounting

0 1 2 2,000 2,000

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

Hh1.

Account

1. Consider another uneven cash flow stream:
Year
0
1
2
34
5
Cash Flow (RM)
2,000
2,000
0
1,500
2,500
4,000
a. What is the present (Year 0) value of the cash flow stream if the
opportunity cost rate is 10 percent?
b. What is the future (Year 5) value of the cash flow stream if the cash
flows are invested in an account that pays 10 percent annually?
c. What cash flow today (Year 0), in lieu of the RM2,000 cash flow, would
be needed to accumulate RM20,000 at the end of Year 5? (Assume
that the cash flows for Years 1 through 5 remain the same.)
4

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