Income Stream
End of Year	A	B
1	$4,000	$1,000
2	$3,000	$2,000
3	$2,000	$3,000
4	$1,000	$4,000
Total	$10,000	$10,000

Consider the streams of income given in the following table:

.

a. Find the present value of each income stream, using a discount rate of 1%,

then repeat those calculations using a discount rate of 8%.

b. Compare the calculated present values and discuss them in light of the fact that the undiscounted total income amounts to $10,000

in each case.

a. The present value of income stream A, using a discount rate of 1% is $(Round to the nearest cent.)

The present value of income stream B, using a discount rate of 1% is $ (Round to the nearest cent.)

The present value of income stream A, using a discount rate of 8% is $

(Round to the nearest cent.)

The present value of income stream B, using a discount rate of 8% is $

(Round to the nearest cent.)

b. Compare the calculated present values and discuss them in light of the fact that the undiscounted total income amounts to

$ 10,000

in each case. (Select the best choice below.)

A.

Although the total amount is the same, income stream B has a lower present value because the interest rate is assumed to be fixed during the investment period.

B.

Although the total amount is the same, income stream B has a lower present value because large cash flows occur in later years and are discounted more at a given interest rate level.

C.

Although the total amount is the same, income stream B has a lower present value because the number of investment years is limited to only four years.

D.

Although the total amount is the same, income stream B has a lower present value because small cash flows occur in early years and are discounted more at a higher interest rate.