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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