LMS Integrated for MindTap Finance, 1 term (6 months) Printed Access Card for Brigham/Houston's Fundamentals of Financial Management, Concise Edition, 9th
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Chapter 5, Problem 18P

a.

Summary Introduction

To calculate: Present value of cash flow stream at 5% discounting rate.

Present value of cash flow:

It is also called as discounted value. It defines that amount of money that invested at a given rate of interest will increases the amount of future cash flow at that particular time in future.

a.

Expert Solution
Check Mark

Explanation of Solution

Calculation of present value of cash flow stream at 5% discounting rate

YearDiscounting Rate Cash Flows Present value of cash flows
Stream AStream B

Stream A

(B×C)

Stream B

(B×D)

ABCDEF
01.0000000000
10.952381150250142.8572238.0953
20.907029450450408.1631408.1631
3 0.863838450450 388.7271 388.7271
40.822702450450370.2159370.2159
50.783526250150195.8815117.5289
Present value for Stream A and Stream B1505.8451522.73

Table (1)

Working Note to calculate discounting rate

Formula to calculate discounting rate for year 1

DiscountRate=1(1+Interestrate)Numberofyears=1(1+0.05)1=0.952381

Formula to calculate discounting rate for year 2

DiscountRate=1(1+Interestrate)Numberofyears=1(1+0.05)2=0.907029

Formula to calculate discounting rate for year 3

DiscountRate=1(1+Interestrate)Numberofyears=1(1+0.05)3=0.863838

Formula to calculate discounting rate for year 4

DiscountRate=1(1+Interestrate)Numberofyears=1(1+0.05)4=0.822702

Formula to calculate discounting rate for year 5

DiscountRate=1(1+Interestrate)Numberofyears=1(1+0.08)5=0.783526

Conclusion

Present value for Stream A and Stream B is $1,505.84 and $1,522.73, respectively.

b.

Summary Introduction

To calculate: Present value of cash flow stream at 0% discounting rate.

Present value of cash flow:

It is also called as discounted value. It defines that amount of money that invested at a given rate of interest will increases the amount of future cash flow at that particular time in future.

b.

Expert Solution
Check Mark

Explanation of Solution

Calculation of present value of cash flow stream at 0% discounting rate

YearDiscounting Rate Cash Flows Present value of cash flows
Stream AStream B

Stream A

B×C

Stream B

B×D

ABCDEF
01.0000000000
11.000000150250150250
21.000000450450450450
3 1.000000450450

450

450

41.000000450450450450
51.000000250150250150
Present value for Stream A and Stream B1,7501,750

Table (2)

Working Note to calculate discounting rate

Formula to calculate discounting rate for year 1

DiscountRate=1(1+Interestrate)Numberofyears=1(1+0.00)1=1.0000

Formula to calculate discounting rate for year 2

DiscountRate=1(1+Interestrate)Numberofyears=1(1+0.00)2=1.0000

Formula to calculate discounting rate for year 3

DiscountRate=1(1+Interestrate)Numberofyears=1(1+0.00)3=1.0000

Formula to calculate discounting rate for year 4

DiscountRate=1(1+Interestrate)Numberofyears=1(1+0.00)4=1.0000

Formula to calculate discounting rate for year 5

DiscountRate=1(1+Interestrate)Numberofyears=1(1+0.00)5=1.0000

Conclusion

Present value for Stream A and Stream B is $1,750 and $1,750 respectively.

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Chapter 5 Solutions

LMS Integrated for MindTap Finance, 1 term (6 months) Printed Access Card for Brigham/Houston's Fundamentals of Financial Management, Concise Edition, 9th

Ch. 5 - FINDING THE REQUIRED INTEREST RATE Your parents...Ch. 5 - Prob. 4PCh. 5 - TIME TO REACH A FINANCIAL GOAL You have 33,556.25...Ch. 5 - Prob. 6PCh. 5 - PRESENT AND FUTURE VALUES OF A CASH FLOW STREAM An...Ch. 5 - LOAN AMORTIZATION AND EAR You want to buy a car,...Ch. 5 - Prob. 9PCh. 5 - PRESENT AND FUTURE VALUES FOR DIFFERENT INTEREST...Ch. 5 - GROWTH RATES Sawyer Corporations 2015 sales were 5...Ch. 5 - EFFECTIVE RATE OF INTEREST Find the interest rates...Ch. 5 - Prob. 13PCh. 5 - Prob. 14PCh. 5 - PRESENT VALUE OF AN ANNUITY Find the present...Ch. 5 - Prob. 16PCh. 5 - EFFECTIVE INTEREST RATE You borrow 230,000; the...Ch. 5 - Prob. 18PCh. 5 - FUTURE VALUE OF AN ANNUITY Your client is 26 years...Ch. 5 - Prob. 20PCh. 5 - EVALUATING LUMP SUMS AND ANNUITIES Kristina just...Ch. 5 - LOAN AMORTIZATION Jan sold her house on December...Ch. 5 - Prob. 23PCh. 5 - Prob. 24PCh. 5 - Prob. 25PCh. 5 - PV AND LOAN ELIGIBILITY You have saved 4,000 for a...Ch. 5 - EFFECTIVE VERSUS NOMINAL INTEREST RATES Bank A...Ch. 5 - NOMINAL INTEREST RATE AND EXTENDING CREDIT As a...Ch. 5 - BUILDING CREDIT COST INTO PRICES Your firm sells...Ch. 5 - Prob. 30PCh. 5 - REQUIRED LUMP SUM PAYMENT Starting next year, you...Ch. 5 - REACHING A FINANCIAL GOAL Six years from today you...Ch. 5 - FV OF UNEVEN CASH FLOW You want to buy a house...Ch. 5 - AMORTIZATION SCHEDULE a. Set up an amortization...Ch. 5 - AMORTIZATION SCHEDULE WITH A BALLOON PAYMENT You...Ch. 5 - Prob. 36PCh. 5 - Prob. 37PCh. 5 - Prob. 38PCh. 5 - Prob. 39PCh. 5 - REQUIRED ANNUITY PAYMENTS A father is now planning...Ch. 5 - Prob. 41SPCh. 5 - Prob. 42IC
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