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Math Help - Computing the present value of a series of cash flows

  1. #1
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    Question 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?

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  2. #2
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    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 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?
    Last edited by SpringFan25; October 6th 2010 at 09:15 AM.
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  3. #3
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    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...
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  4. #4
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    i thought he was asking for a PV of the 90.75, rather than how to get the 90.75?
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  5. #5
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    Yes, he is; I gave him that so he could "see" the flows...
    I think he's smart enough to calculate the PV himself.
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  6. #6
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    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.
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  7. #7
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    Please help me!
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