Ch os Assignment- Time Value of Money The Purple Lion Beverage Company expects t
ID: 2403634 • Letter: C
Question
Ch os Assignment- Time Value of Money The Purple Lion Beverage Company expects the following cash flows from its manufacturing plant in Palau over the next three years: Annual Cash Flows Year 1 Year 2 Year 3 $100,000 $37,500 $180,000 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? $317,500 O $1,475,000 O $290,844 $1,692,500 Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments: Uneven Cash Flows Annuity Payments Description Shania bought a new dress for her brother's wedding for $450. She negotiated a deal with the retailer in which she would pay for the dress in three installments of $250, $100, and $100 over the next three months. You signed up to make a monthly payment of $10 for one year for a lifetime subscription to your favorite magazine. British consols are British government bonds that promise to make payments of a specified amount at regular intervals to the bearer forever. You receive interest earnings from variable deposits in a regular interest-bearing savings account.Explanation / Answer
Answers
Working
Year
PV factor at 4%
Annual Cash Flows
Present Values
[A]
[B]
[A x B]
1
0.961538462
$ 100,000.00
$ 96,153.85
2
0.924556213
$ 37,500.00
$ 34,670.86
3
0.888996359
$ 180,000.00
$ 160,019.34
Total Present Values
$ 290,844.05
----Hence, the correct answer is Option #3: $ 290,844
Description no.
Answer
Reason
1
Uneven Cash flows,
because the amount to be received each period is NOT SAME.
2
Annuity Payments
because amount of cash flows will be $10, same.
3
Annuity Payments
because the payment will be of 'specified amout' and at regular intervals
4
Uneven Cash flows,
because the interest to be receivable of variable deposit will not be same each period.
Year
PV factor at 4%
Annual Cash Flows
Present Values
[A]
[B]
[A x B]
1
0.961538462
$ 100,000.00
$ 96,153.85
2
0.924556213
$ 37,500.00
$ 34,670.86
3
0.888996359
$ 180,000.00
$ 160,019.34
Total Present Values
$ 290,844.05