A series, or stream, of cash flows may not always necessarily be an annuity. Cas
ID: 2617430 • Letter: A
Question
A series, or stream, of cash flows may not always necessarily be an annuity. Cash flows can also be uneven and nonconstant, but the concept of the time value of money applies to uneven cash flows as well.
Consider the following case:
Swanky Beverage Co. expects the following cash flows from its manufacturing plant in Palau over the next 5 years:
The CFO of the company believes that an appropriate annual interest rate on this investment is 8%. What is the present value of this uneven cash flow stream (rounded to the nearest whole dollar)?
$13,940,599
$16,750,000
$24,200,000
$15,921,700
Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments:
Description
Uneven Cash Flows
Annuity Payments
Year Annual Cash Flows 1 $3,900,000 2 $2,450,000 3 $5,000,000 4 $4,000,000 5 $4,850,000Explanation / Answer
Question - 1
Year
Annual Cash Flows
Present Value Factor at 8%
Present Value of Annual Cash Flows
1
3,900,000
0.925925926
3,611,111
2
2,450,000
0.85733882
2,100,480
3
5,000,000
0.793832241
3,969,161
4
4,000,000
0.735029853
2,940,119
5
4,850,000
0.680583197
3,300,829
Total Present Value
$15,921,700
The Present Value of this uneven cash flow stream = $15,921,700
Question – 2
Trnsaction
Type of Payments
Eleanor has been donating 10% of her salary at the end of every year to charity for the last three years. Her salary increased by 15% every year in the last three years.
Uneven Cash Flows
You deposit a certain equal amount of money every year into your pension fund.
Annuity Payments
Jacques receives quarterly dividends from his investment in a high-dividend yield, index exchange–traded fund.
Uneven Cash Flows
Musashi borrowed some money from his friend to start a new business. He promises to pay his friend $2,650 every year for the next five years to pay off his loan along with interest.
Annuity Payments
Year
Annual Cash Flows
Present Value Factor at 8%
Present Value of Annual Cash Flows
1
3,900,000
0.925925926
3,611,111
2
2,450,000
0.85733882
2,100,480
3
5,000,000
0.793832241
3,969,161
4
4,000,000
0.735029853
2,940,119
5
4,850,000
0.680583197
3,300,829
Total Present Value
$15,921,700
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