P4–31 Relationship between future value and present value ...
P4–31 Relationship between future value and present value—Mixed stream Using
only the information in the accompanying table, answer the questions that
follow.
a. Determine the present value of the mixed stream of cash flows using a 5%
discount rate.
$5,243.17
b. How much would you be willing to pay for an opportunity to buy this
stream, assuming that you can at best earn 5% on your investments?
$5,243.17
c. What effect, if any, would a 7% rather than a 5% opportunity cost have on
your analysis? (Explain verbally.)Future value interest factor
Year (t) Cash flow at 5% (FVIF5%,n)
1 $ 800 1.050
2 900 1.102
3 1,000 1.158
4 1,500 1.216
5 2,000 1.276
The concept of the Time Value of Money states that a dollar today is worth more than a dollar tomorrow. Based on this, we know that money loses value, and the Discount rate we use to discount future cash flows to their present values can actually be considered an opportunity cost. The higher the discount rate, the lower the present value of the cash flows. Therefore, if the opportunity cost is 7% instead of 5%, the present value of the stream would decrease to $4,920.37
Please see the attached excel sheet for calculations
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