using financial functions in excel, answer the following; Cashflow: Use financia

Question

using financial functions in excel, answer the following;

Cashflow: Use financial calculations in Excel to determine which of the following is the most valuable cash flow (assume a discount rate of 7%):
i. Receive $60,000 today and once again receive $60,000 four years from now
ii. Receive $12,000 today and again every year for 12 years
iii. Next year pay $50,000; and then again pay $50,000 each year for three more years; then receive $30,000 a year every year for 25 years.
Does your answer change if you assume a discount rate of 5%? If so, how and why?

Explanation / Answer

Formula to calculate PV in excel is as follows

"=PV(interest rate,Year,0,cashflow)"

I. Discounting at 7%

i. Receive $60,000 today and once again receive $60,000 four years from now

Present Value = 60000+45773.71

= 105,773.71

ii. Receive $12,000 today and again every year for 12 years

Present Value = 107,312.24

iii. Next year pay $50,000; and then again pay $50,000 each year for three more years; then receive $30,000 a year every year for 25 years.

Present Value = 78,630.59

Analysis: Present value ois high for option 2

II. Discounting at 5%

i. Receive $60,000 today and once again receive $60,000 four years from now

Present Value = 109,362.15

ii. Receive $12,000 today and again every year for 12 years

Present Value = 118,359.02

iii. Next year pay $50,000; and then again pay $50,000 each year for three more years; then receive $30,000 a year every year for 25 years.

Present Value = 139,142.30

Analysis: Present value ois high for option 3

Yes. Our answer changes when the discounting rate decreases from 7% to 5%. This is because the company's required return changes, associated risk changes etc...

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