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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 five years:

Annual Cash Flows
Year 1 Year 2 Year 3
100,000 37,500 330,000

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?

a) 1, 450,000 b) $424, 194 c) $1, 817, 500 d) $467, 500

Respuesta :

B)  $424, 194

Explanation:

With a discount rate of 4.00% and a span of 5 years, This projected cash flows are worth $424,193.50 as present value, which is greater than the initial $0.00 ( assumed as there is no initial investment made by the company.. The resulting positive NPV of the above project is $424,193.50, which indicates that pursuing the above project may be optimal and the amount $424,193.50

has been rounded to the nearest whole dollar $424, 194

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