Calculate the present value of uneven stream of cash flows

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Reference no: EM132651395

Question 1: Calculate the present value of the following uneven stream of cash flows. Assume an 8 percent discount rate.

End of Year               Cash Flow
1    $10,000
2       10,000
3                             10,000
4                             12,000
5 12,000
6 12,000
7 12,000
8 15,000
9                             15,000
10    15,000

Question 2: Assume that you just won the state lottery. Your prize can be taken either in the form of $40,000 at the end of each of the next 25 years or as a single payment of $500,000 paid immediately.

A. If you expect to be able to earn 5 percent annually on your investments over the next 25 years (i.e. 5 percent is the appropriate discount rate), ignoring taxes and other considerations, which alternative should you take? Assume that your only decision criteria is selecting the option with the highest present value.

B. Would your decision in part (a) be altered if you could earn 7 percent rather than 5 percent on your investments over the next 25 years?

Reference no: EM132651395

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