PROBLEM 3 Consider the following uneven cash flow stream: Year Cash Flow 0 $0 1

Question

PROBLEM 3 Consider the following uneven cash flow stream: Year Cash Flow 0 $0 1 $575 2 $650 3 $750 4 $825 5 $850 a. What is the net present (Year 0) value if the opportunity cost (discount) rate is 8.5 percent? b. Add an ouflow (or cost) of $1,450 at the outset. What is the present value (or net present value) of the     stream? PROBLEM 3 Consider the following uneven cash flow stream: Year Cash Flow 0 $0 1 $575 2 $650 3 $750 4 $825 5 $850 a. What is the net present (Year 0) value if the opportunity cost (discount) rate is 8.5 percent? b. Add an ouflow (or cost) of $1,450 at the outset. What is the present value (or net present value) of the     stream?

Explanation / Answer

NPV is calculated by discounting the cashflows

PV = C/(1+r)^n

C - Cashflow

r - Discount rate

n - years to the cashflow

a.

NPV = $2829.87

b.

PV = 2829.87 - 1450 = $1379.87

Rate 8.50% Year Cashflow (A) Discount rate = 1/(1+r)^(n) Present value of cashflow = A*discount rate 0 0.00 1.00 0.00 1 575.00 0.92 529.95 2 650.00 0.85 552.15 3 750.00 0.78 587.18 4 825.00 0.72 595.30 5 850.00 0.67 565.29 NPV 2829.87

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