Chapter 4, Problem 1CC

Summary Introduction

Cash flows:

Inflow and outflow movement of cash is known as Cash flows. Cash flows are the expected cash to be generated by an asset, investment or business. There are two types of cash flows, namely cash inflow and cash outflow. The payments refer to cash outflows and receipts refer to cash inflows.

Present Value:

Present value is that value of money which measures the worth of a future amount in today’s value adjusted for interest and inflation. It is used in finance for the valuation of future value, stock and bond pricing.

To Explain:

The calculation of the present value of cash flow stream.

Answer to Problem 1CC

There is a formula which is used to calculate the present value of cash flow stream and that,

Where,

• is the present value of the cash flow stream.
• is the cash flow which occurs at the end of the year t_1.
• is the discount rate.
• is the year, which ranges from 0 to n.
• is the last year in which a cash flow occurs.

Explanation of Solution

• Cash flow is the value of the various inflows and outflows. Some investments have a specific period of time or some are for the perpetuity basis.
• For the calculation of present value of various cash flows, it is required to know about the components like, the total future cash flows from the investment, interest rate at which interest amount will be calculated and time period.
• Discount rate is the rate which prevails in the open market at which the future values are discounted to get the value as on today.

Conclusion

The calculation of the present value depends upon the various factors (cash flow, discount rate, and time period).