Present Value - Mixed streams and Comparison
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Consider the mixed streams of cash flows shown in the following table.
YEAR A B
1 $50,000 $10,000
2 $40,000 $20,000
3 $30,000 $30,000
4 $20,000 $40,000
5 $10,000 $50,000
Totals $150,000 $150,000
(a) Find the present value of each stream using a 15% discount rate
(b) Compare the calculated present values and discuss them in light of the fact that the undiscounted cash flows total $150,000 in each case.
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Solution Summary
Present values are computed for the two cash flow streams and then compared.
Solution Preview
(a) For A:
Present value = 50000/(1 + 0.15)^1 + 40000/(1 + 0.15)^2 + 30000/(1 + 0.15)^3 + 20000/(1 + 0.15)^4 +
10000/(1 + 0.15)^5 = ...
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