A series, or stream, of cash flows may not always necessarily be an annuity. Cash flows can also be uneven and nonconstant, but the concept of the time value of money applies to uneven cash flows as well. Consider the following case: Swanky Beverage Co. expects the following cash flows from its manufacturing plant in Palau over the next 5 years: Year Annual Cash Flows 1 $4,600,000 2 $2,150,000 3 $6,000,000 4 $5,200,000 5 $4,250,000 1. The CFO of the company believes that an appropriate annual interest rate on this investment is 7%. What is the present value of this uneven cash flow stream (rounded to the nearest whole dollar)? $18,071,991 $19,050,000 $27,200,000 $16,444,948
A series, or stream, of cash flows may not always necessarily be an annuity. Cash flows can also be uneven and nonconstant, but the concept of the time value of money applies to uneven cash flows as well. Consider the following case: Swanky Beverage Co. expects the following cash flows from its manufacturing plant in Palau over the next 5 years: Year Annual Cash Flows 1 $4,600,000 2 $2,150,000 3 $6,000,000 4 $5,200,000 5 $4,250,000 1. The CFO of the company believes that an appropriate annual interest rate on this investment is 7%. What is the present value of this uneven cash flow stream (rounded to the nearest whole dollar)? $18,071,991 $19,050,000 $27,200,000 $16,444,948
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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8. Unevencash flows
A series, or stream, of cash flows may not always necessarily be an annuity . Cash flows can also be uneven and nonconstant, but the concept of the time value of money applies to uneven cash flows as well.
Consider the following case:
Swanky Beverage Co. expects the following cash flows from its manufacturing plant in Palau over the next 5 years:
|
Year
|
Annual Cash Flows
|
|---|---|
| 1 | $4,600,000 |
| 2 | $2,150,000 |
| 3 | $6,000,000 |
| 4 | $5,200,000 |
| 5 | $4,250,000 |
1.
The CFO of the company believes that an appropriate annual interest rate on this investment is 7%. What is the present value of this uneven cash flow stream (rounded to the nearest whole dollar)?
$18,071,991
$19,050,000
$27,200,000
$16,444,948
2. Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments.
|
Description
|
Uneven Cash Flows
|
Annuity Payments
|
|
|---|---|---|---|
| Susan has been donating 10% of her salary at the end of every year to charity for the last three years. Her salary increased by 15% every year in the last three years. |
|
|
|
| You deposit a certain equal amount of money every year into your pension fund. |
|
|
|
| Alex receives quarterly dividends from his investment in a high-dividend yield, index exchange–traded fund. |
|
|
|
| Clancy borrowed some money from his friend to start a new business. He promises to pay his friend $2,650 every year for the next five years to pay off his loan along with interest. |
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