Value of Cash Flows
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Question 3 (TVM) (15 marks)
Consider the following stream of cash flows:
where the payments of X start one year from today and last for 10 years; and the payments of Y start in 11 years from now and last forever. The interest rate is 4%.
(a) If X = $100 and Y = $200, what is the present value of this stream? (4 marks)
(b) If the present value of the stream is $4,000 and Y = $100, what is the value of X? (5 marks)
(c) Assume now that the value of the stream at year 10 is $8,000 and that Y = 3X. What is the value of X? (6 marks)
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Solution Summary
This solution is comprised of a detailed explanation to find the present value of the payment stream.
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Question 3 (TVM) (15 marks)
Consider the following stream of cash flows:
where the payments of X start one year from today and last for 10 years; and the payments of Y start in 11 years from now and last forever. The interest rate is 4%.
(a) If X = $100 and Y = $200, what is the present value of this stream? (4 marks)
You can use present value of annuity formula to find the present value for X stream of cash flows for the 10 years.
PVA = W x 1 - 1 where PVA is the present value
(1 + R)N W is the amount required of annuity each year
R R is the interest rate
N is the period
PVA = 100 x 1 ...
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