Question

A series of cash flows may not always necessarily be an annuity. Cash flows can also be uneven and variable in amount, but the concept of the time value of money will continue to apply. Consider the following case: The Purple Lion Beverage Company expects the following cash flows from its manufacturing plant in Palau over the next six years: Annual Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 $400,000 $37,500 $480,000 $450,000 $550,000 $375,000 The CFO of the company believes that an appropriate annual interest rate on this investment is 4%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar

Answer 1

Answer:

Total PV= $1,979,094.24

Explanation:

To calculate the present value, we need to use the following formula on each cash flow:

PV= Cf/(1+i)^n

Cf1= 400,000/1.04= 384,615.38

Cf2= 37,500/1.04^2= 34,670.86

Cf3= 480,000/1.04^3= 426,718.25

Cf4= 450,000/1.04^4= 384,661.89

Cf5= 550,000/1.04^5= 452,059.91

Cf6= 375,000/1.04^6= 296,367.95

Total PV= $1,979,094.24