(Present value of complex cash flows) You have an opportunity to make an investm

Question

(Present value of complex cash flows) You have an opportunity to make an investment that will pay $500 at the end of the first year, $200 at the end of the second year, $100 at the end of the third year, $100 at the end of the fourth year, and $500 at the end of the fifth year a. Find the present value if the interest rate is 11 percent. (Hint: You can simply bring each cash flow back to the present and then add them up. Another way to work this problem is to either use the NPV function in Excel or to use your CF key on a financial calculatorut you'll want to check your calculator's manual before you use this key. Keep in mind that with the NPV function in Excel, there is no initial outlay. That is, all this function does is bring all the future cash flows back to the present. With a financial calculator, you should keep in mind that CFis the initial outlay or cash flow at time 0, and, because there is no cash flow at time 0, CFo0.) b. What would happen to the present value of this stream of cash flows if the interest rate were zero percent?

Explanation / Answer

NPV =

We can see that the Excel Financial Calculator i.e. = NPV function is fetching 1048

Also the Manual Calulation also giving the same 1048 as NPV. We have computed the Present Value Factor of Discounting rate in the 3rd Column [ 1/(1+r)^t ]

b)

Both the cases the NPV will be sum of all the cash flows i.e 1400, if the Discounting rate is 0%

a) Computation of NPV Year CF DF@11% PV 0 0 1 500 0.901 450.45 2 200 0.812 162.32 3 100 0.731 73.12 4 100 0.659 65.87 5 500 0.593 296.73 NPV = $1,048.49

NPV =

1048.49

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