Consider the mixed streams of cash flows in the following table Year. Cash flow
ID: 2712654 • Letter: C
Question
Consider the mixed streams of cash flows in the following table Year. Cash flow stream A. B 1. 22500. 7500 2. 18750. 11250 3. 15000. 15000 4. 11250. 18750 5. 7500. 22500 Totals. 75000. 75000Find the present value of each stream A and B using a 12% discount rate Compare the calculated present values and discuss them in light of the in discounted cash flows totaling 75,000 in each case
Choose correct fill ins . cash flows stream A with a present value of ........is higher or lower than cash flow stream B present value of ......... Because the larger or smaller cash inflows occur in A in the early years when the present value is greater, while the smaller or larger cash flows are received further in the earlier years or future. Consider the mixed streams of cash flows in the following table Year. Cash flow stream A. B 1. 22500. 7500 2. 18750. 11250 3. 15000. 15000 4. 11250. 18750 5. 7500. 22500 Totals. 75000. 75000
Find the present value of each stream A and B using a 12% discount rate Compare the calculated present values and discuss them in light of the in discounted cash flows totaling 75,000 in each case
Choose correct fill ins . cash flows stream A with a present value of ........is higher or lower than cash flow stream B present value of ......... Because the larger or smaller cash inflows occur in A in the early years when the present value is greater, while the smaller or larger cash flows are received further in the earlier years or future. Year. Cash flow stream A. B 1. 22500. 7500 2. 18750. 11250 3. 15000. 15000 4. 11250. 18750 5. 7500. 22500 Totals. 75000. 75000
Find the present value of each stream A and B using a 12% discount rate Compare the calculated present values and discuss them in light of the in discounted cash flows totaling 75,000 in each case
Choose correct fill ins . cash flows stream A with a present value of ........is higher or lower than cash flow stream B present value of ......... Because the larger or smaller cash inflows occur in A in the early years when the present value is greater, while the smaller or larger cash flows are received further in the earlier years or future.
Explanation / Answer
Cash flow A
Year
Cash flow
PV factor 12%
PV
1
22500
0.8929
$20,089.29
2
18750
0.7972
$14,947.39
3
15000
0.7118
$10,676.70
4
11250
0.6355
$7,149.58
5
7500
0.5674
$4,255.70
$57,118.65
Cash flow B
Year
Cash flow
PV factor 12%
PV
1
7500
0.8929
$6,696.43
2
11250
0.7972
$8,968.43
3
15000
0.7118
$10,676.70
4
18750
0.6355
$11,915.96
5
22500
0.5674
$12,767.10
$51,024.63
We can see that both stream has equal total cash flows but the sequence is different. In reality, the timing of cash flow matter, the value of 1 dollar received today is higher than the value of 1 dollar received after 1 year. Stream A has higher cash flows in initial years that’s why it has higher PV of cash flows.
Year
Cash flow
PV factor 12%
PV
1
22500
0.8929
$20,089.29
2
18750
0.7972
$14,947.39
3
15000
0.7118
$10,676.70
4
11250
0.6355
$7,149.58
5
7500
0.5674
$4,255.70
$57,118.65