Uneven cash flows A series of cash flows may not always necessarily be an annuity. Cash flows can also be uneven and variable in amount, but the concept of the time value of money will continue to apply. Consider the following case: The Purple Lion Beverage Company expects the following cash flows from its manufacturing plant in Palau over the next five years: Annual Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 $250,000 $20,000 $180,000 $450,000 $550,000 The CFO of the company believes that an appropriate annual interest rate on this investment is 4%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar? $450,000 $2,000,000 $1,800,000 $1,255,617 Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments: Description Uneven Cash Flows Annuity Payments You recently moved to a new apartment and signed a contract to pay monthly rent to your landlord for a year. SOE Corp. hires an average of 10 people every year and matches the contribution of each employee toward his or her retirement fund. Franklinia Venture Capital (FVC) invested in a budding entrepreneur’s restaurant. The restaurant owner promises to pay FVC 10% of the profit each month for the next 10 years. You have committed to deposit $600 in a fixed interest–bearing account every quarter for four years.
Uneven cash flows A series of cash flows may not always necessarily be an annuity. Cash flows can also be uneven and variable in amount, but the concept of the time value of money will continue to apply. Consider the following case: The Purple Lion Beverage Company expects the following cash flows from its manufacturing plant in Palau over the next five years: Annual Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 $250,000 $20,000 $180,000 $450,000 $550,000 The CFO of the company believes that an appropriate annual interest rate on this investment is 4%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar? $450,000 $2,000,000 $1,800,000 $1,255,617 Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments: Description Uneven Cash Flows Annuity Payments You recently moved to a new apartment and signed a contract to pay monthly rent to your landlord for a year. SOE Corp. hires an average of 10 people every year and matches the contribution of each employee toward his or her retirement fund. Franklinia Venture Capital (FVC) invested in a budding entrepreneur’s restaurant. The restaurant owner promises to pay FVC 10% of the profit each month for the next 10 years. You have committed to deposit $600 in a fixed interest–bearing account every quarter for four years.
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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Question
7. Uneven cash flows
A series of cash flows may not always necessarily be an annuity . Cash flows can also be uneven and variable in amount, but the concept of the time value of money will continue to apply.
Consider the following case:
The Purple Lion Beverage Company expects the following cash flows from its manufacturing plant in Palau over the next five years:
|
Annual Cash Flows
|
||||
|---|---|---|---|---|
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
| $250,000 | $20,000 | $180,000 | $450,000 | $550,000 |
The CFO of the company believes that an appropriate annual interest rate on this investment is 4%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar?
$450,000
$2,000,000
$1,800,000
$1,255,617
Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments:
|
Description
|
Uneven Cash Flows
|
Annuity Payments
|
|
|---|---|---|---|
| You recently moved to a new apartment and signed a contract to pay monthly rent to your landlord for a year. |
|
|
|
| SOE Corp. hires an average of 10 people every year and matches the contribution of each employee toward his or her retirement fund. |
|
|
|
| Franklinia Venture Capital (FVC) invested in a budding entrepreneur’s restaurant. The restaurant owner promises to pay FVC 10% of the profit each month for the next 10 years. |
|
|
|
| You have committed to deposit $600 in a fixed interest–bearing account every quarter for four years. |
Expert Solution
Step 1
| Calculation of present value of cash flows of the purple Lion beverage company | |||||
| EOY |
ANNUAL CASH FLOWS
(A) |
PRESENT VALUE INTEREST FACTORS @ 4% (B) |
PRESENT VALUE OF CASH FLOWS
(C)=(A)*(B) |
(Amount in $) | |
| Year 1 | 2,50,000 | 0.962 | 240385 | ||
| year 2 | 20,000 | 0.925 | 18491 | ||
| Year 3 | 1,80,000 | 0.889 | 160019 | ||
| Year 4 | 4,50,000 | 0.855 | 384662 | ||
| Year 5 | 5,50,000 | 0.822 | 452060 | ||
| Present value of uneven cash flows | 1255617 | ||||
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