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Almario Bsa2d At3 Fin2

Stream A has a higher present value than Stream B, despite both having the same total undiscounted cash flows of $150,000. Stream A's present value is $109,857 compared to Stream B's present value of $91,273. This is because Stream A's cash flows are received earlier on average than Stream B's cash flows. When discounted at 15%, earlier cash flows have a higher present value. Taking the lottery prize as a 25-year annuity that pays $40,000 annually, rather than a single $500,000 lump sum payment, results in a higher present value of $563,757.78 given a 5% discount rate. Therefore, the annuity option is preferable if

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115 views2 pages

Almario Bsa2d At3 Fin2

Stream A has a higher present value than Stream B, despite both having the same total undiscounted cash flows of $150,000. Stream A's present value is $109,857 compared to Stream B's present value of $91,273. This is because Stream A's cash flows are received earlier on average than Stream B's cash flows. When discounted at 15%, earlier cash flows have a higher present value. Taking the lottery prize as a 25-year annuity that pays $40,000 annually, rather than a single $500,000 lump sum payment, results in a higher present value of $563,757.78 given a 5% discount rate. Therefore, the annuity option is preferable if

Uploaded by

Tracy Camille
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Assessment Task 3

Compute for the following. Given the uneven streams of cash flows shown in the following table,
answers parts A & B:

a. Find the present value of each stream, using a 15 percent discount rate.

Stream Year (t) CFt x (1 + .15)-t Present value


A 1 $ 50,000 x .869565 $ 43,479
2 $ 40,000 x .756144 $ 30,246
3 $ 30,000 x .657516 $ 19,725
4 $ 20,000 x .571753 $ 11,435
5 $ 10,000 x .497177 $ 4,972
Total = $ 109,857

b. Compare the calculated present values, and discuss them in the light of the fact that the
undiscounted total cash flows amount to Php 150,0000 in each case.

Stream Year (t) CFt x (1 + .15)-t Present value


B 1 $ 10,000 x .869565 $ 8,696
2 $ 20,000 x .756144 $15,123
3 $ 30,000 x .657516 $ 19,725
4 $ 40,000 x .571753 $ 22,870
5 $ 50,000 x .497177 $ 24,859
Total = $ 91,273
1. Assume that you just won the state lottery. Your prize can be taken either in the form of Php
40,000 at the end of the next 25 years or as a single payment of Php 500,000 paid immediately.

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

N= 25, I = 5%, PMT = $40,000


PV = $563,757.78

At 5%, it’s better to take the award as an annuity because the present value will be
$563,760, compared in receiving $500,000 as a lump sum. However, one has to live at
least 23.5 years [25 - (63,757.78 excess / $40,000)] to benefit more from the annuity
stream of payments.

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