a. Find the present values of the following cash flow streams. The appropriate interest rate is 8 percent.

(Hint: It is fairly easy to work this problem dealing with the individual cash flows. However, if you have a financial calculator, read the section of the manual that describes how to enter cash flows such as the ones in this problem. This will take a little time, but the investment will pay huge dividends throughout the course. Note, if you do work with the cash flow register, then you must enter CF0 = 0.)

b. What is the value of each cash flow stream at a 0 percent interest rate?

SOLUTION:

a.

Cash Stream A 8% 0 1 2 3
| | | |

8%

4
|

5
|

0
|

Cash Stream B 1 2 3 4
| | | |

5
|

PV = ? 100

400

400 400

300

PV = ? 300 400 400

400

100

With a financial calculator, simply enter the cash flows (be sure to enter CF0 = 0), enter I = 8, and press the NPV key to find NPV = PV = $1,251.25 for the first problem. Override I = 8 with I = 0 to find the next PV for Cash Stream A. Cash Stream B to get NPV = PV = $1,300.32.

b. PVA = $100 + $400 + $400 + $400 + $300 = $1,600. PVB = $300 + $400 + $400 + $400 + $100 = $1,600