Question
Time Value of Money: Uneven Cash Flows Many financial decisions require the analysis of uneven, or nonconstant, cash flows. -Select-PreferredCommonCorrect 1 of Item 1 stock
Time Value of Money: Uneven Cash Flows
Many financial decisions require the analysis of uneven, or nonconstant, cash flows. -Select-PreferredCommonCorrect 1 of Item 1 stock dividends typically increase over time, and investments in capital equipment almost always generate uneven cash flows. The term cash flow (CFt) denotes -Select-equalunevenCorrect 2 of Item 1 cash flows, while payment (PMT) designates -Select-equalunevenCorrect 3 of Item 1 cash flows coming at regular intervals.
The present value of an uneven cash flow stream is the sum of the PVs of the individual cash flows. The equation is:
Similarly, the future value of an uneven cash flow stream is the sum of the FVs of the individual cash flows. Many calculators have an NFV key that lets you obtain the FV. However, if your calculator doesn't have a net future value (NFV) key, you can calculate the NFV as follows:
NFV = NPV (1 + I)N.
One can also find the interest rate of the uneven cash flow stream with a financial calculator and solving for the -Select-net of future value (NFV)internal rate of return (IRR)net of present value (NPV)Correct 4 of Item 1 using the -Select-NFVIRRNPVCorrect 5 of Item 1 key.
Quantitative Problem: You own a security with the cash flows shown below.
0 | 1 | 2 | 3 | 4 |
0 | 610 | 355 | 220 | 310 |
If you require an annual return of 12%, what is the present value of this cash flow stream? Round your answer to the nearest cent. Do not round intermediate calculations. $
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started