Consider two streams of cash flows, A and B . Stream A ’s first cash flow is $9,

Question

Consider two streams of cash flows, A and B . Stream A ’s first cash flow is $9,200 and is received three years from today. Future cash flows in Stream A grow by 3 percent in perpetuity. Stream B ’s first cash flow is $9,700, is received two years from today, and will continue in perpetuity. Assume that the appropriate discount rate is 11 percent.

What is the present value of each stream?

Suppose that the two streams are combined into one project, called C. What is the IRR of Project C?

Consider two streams of cash flows, A and B . Stream A ’s first cash flow is $9,200 and is received three years from today. Future cash flows in Stream A grow by 3 percent in perpetuity. Stream B ’s first cash flow is $9,700, is received two years from today, and will continue in perpetuity. Assume that the appropriate discount rate is 11 percent.

Explanation / Answer

Calculation of present value of A Year Cash Flow Net Cash Flow PVAF11% NPV 1 9200 9200 0.9009 8288.29 2 9200*103% 9476 0.8116 7690.93 3 9200*103%*103% 9760 0.7312 7136.43 Total 23115.7 Calculation of Present Value of B Year Cash Flow PVAF11% NPV 1 9700 0.9009 8738.7387 2 9700 0.8116 7872.7376 Total 16611.476

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