# Computing the present value of a series of cash flows

• Oct 6th 2010, 01:36 AM
tungqoo123
Computing the present value of a series of cash flows
Given loan interest rate = 8%
bank saving interest rate = 5%

Given the following yearly cash flows with zero initial capital:
$-1,000$ 900 $800$ -1,200 $700 My teacher gives the answer of the future value of these cash flows at the beginning of the fifth year: (((-1000*1.08 + 900) 1.08 + 800) 1.05 -1200 )*1.08 + 700 = 90. 7504 Now, he asked me to compute the present value of$ 90.7504.
I really don't know how to do since different loan interest rate and saving interest rate are given.
He also said that it is incorrect to simply discount $90.7504 by (1+5%)^4 Can anyone help?(Angry) • Oct 6th 2010, 08:05 AM SpringFan25 frankly, im not sure I agree with your teacher when he said you cant discount the accumulated value at 5% to get the present value. Its obvious that a single investment of$\displaystyle 90.7504 \times 1.05^{-4}$will accumulate to 90.7504 at the start of the 5th year. However, presumably he knows what he is talking about. Perhaps he wants you to discount the cashflows back at a varying rate depending on which interest rate was being used to accumulate the cashflows in that year? • Oct 6th 2010, 08:59 AM Wilmer Perhaps this'll help: Code: Year Flow Interest Balance 1 -1000.00 .00 -1000.00 2 900.00 -80.00 -180.00 3 800.00 -14.40 605.60 4 -1200.00 30.28 -564.12 5 700.00 -45.13 90.7504... • Oct 6th 2010, 10:31 AM SpringFan25 i thought he was asking for a PV of the 90.75, rather than how to get the 90.75? • Oct 6th 2010, 01:28 PM Wilmer Yes, he is; I gave him that so he could "see" the flows... I think he's smart enough to calculate the PV himself. • Oct 6th 2010, 06:20 PM tungqoo123 Sorry, but my teacher wants me to find a appropriate discount rate to discount the$90.75 back to the present value. So, I think the problem would be how to find that appropriate discount rate.(Crying)
• Oct 8th 2010, 09:16 AM
tungqoo123