Consider the following case: The Purple uon Beverage Company expects the followi
ID: 2821876 • Letter: C
Question
Consider the following case: The Purple uon Beverage Company expects the following cash flows from ts manufacturing plant in Palau over the next five years: Annual Cash Flows Year 1 $250,000 $20,000 $480,000 $450,000 $s50,000 Year 2 Year 3 Year 4 Year S The CFO of the company believes that an appropriate annual interest rate on this investment is 9%, what is the present value of this uneven cash flow stream, rounded to the nearest whole doliar? O $1,293,093 o $1,625,000 o $2,125,000 O $750,000 Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments: Uneven Cash Flows Annuity Payments Description Debbie 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. You deposit a certain equal amount of money every year into your pension fund. Amit receives quarterly dividends from his investment in a high-dividend yield, index exchange-traded fund. Aakash 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.Explanation / Answer
Present value of uneven cash flows stream can be calculated by discounting the cash flows by appropriate annual interest rate of 9% and then adding it together in following manner -
Present value of cash flows
= $250,000/ (1+9%) ^1 + $20,000/ (1+9%) ^2 + $480,000/ (1+9%) ^3 + $450,000/ (1+9%) ^4 +$550,000/ (1+9%) ^5
= $229,358 + $16,834 +$370,648 +$318,791 + $357,462
= $1,293,093
Therefore correct answer is option: $1,293,093
Description
Reason
Debbie 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
Debbie’s salary increasing every year so the cash flow in uneven.
You deposit a certain equal amount of money every year into your pension fund
Annuity payments
The amount of deposit is equal for the whole period. Therefore it is annuity payments.
Amit receives quarterly dividends from his investment in a high-dividend yield, index exchange-traded fund.
Uneven cash flows
The amount of dividends from his investment in a high-dividend yield, index exchange-traded fund is not equal for whole period. Therefore the cash flow in uneven.
Aakash 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
Aakash promises to pay his friend $2,650 every year for the next five years. As the amount of payment is equal for each period therefore it is annuity payments.
Description
Reason
Debbie 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
Debbie’s salary increasing every year so the cash flow in uneven.
You deposit a certain equal amount of money every year into your pension fund
Annuity payments
The amount of deposit is equal for the whole period. Therefore it is annuity payments.
Amit receives quarterly dividends from his investment in a high-dividend yield, index exchange-traded fund.
Uneven cash flows
The amount of dividends from his investment in a high-dividend yield, index exchange-traded fund is not equal for whole period. Therefore the cash flow in uneven.
Aakash 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
Aakash promises to pay his friend $2,650 every year for the next five years. As the amount of payment is equal for each period therefore it is annuity payments.
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