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# Present Value of A Mixed Cash Flow Stream

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At the end of 2005, Uma Corporation was considering undertaking a major long-term project in an effort to remain competitive in its industry. The production and sales departments determined the potential annual cash flow savings that could accrue to he firm if it acts soon. Specifically, they estimate that a mixed stream of future cash flow savings will occur at the end of the years 2006 through 2011. The years 2012 through 2016 will see consecutive and equal cash flow savings at the end
of each year. The firm estimates that its discount rate over the first 6 years will be 7%. The expected discount rate over the years 2012 through 20156 will be 11% The project managers will find the project acceptable if it results in present cash flow savings of at least \$860,000.

a) Determine the value - at the beginning of 2006 - of the future cash flow savings expected to be generated by this project.

b) Should the firm undertake this project? Why or why not?

c) Help complete PV values in attaced spreadsheet.

b) ...

#### Solution Summary

Using an Excel 97-2003 spreadsheet, this solution illustrates how to determine the present value of a stream of cash flows discounted at different rates during different periods of time.

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## Calculating Present Value of the Given Mixed Stream

See the attached file.

Relationship between future value and present value-Mixed stream

Using only the information in the accompanying table, answer the questions that follow.
a. Determine the present value of the mixed stream of cash flows using a 5% discount rate.
b. How much would you be willing to pay for an opportunity to buy this stream, assuming that you can at best earn 5% on your investments?
c. What effect, if any, would a 7% rather than a 5% opportunity cost have on your analysis? (Explain verbally).

Rate 5%
Year Cash flow Factor
1 800 1.05
2 900 1.102
3 1000 1.158
4 1400 1.216
5 2000 1.276.

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