Thread: 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?

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 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?

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...

i thought he was asking for a PV of the 90.75, rather than how to get the 90.75?

Yes, he is; I gave him that so he could "see" the flows...
I think he's smart enough to calculate the PV himself.

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.

Please help me!