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Time Value of Money Problems Single and Mixed Streams

The document provides solutions to problems involving the time value of money for single and mixed cash flows. For Problem 1, the summaries are: Mixed stream Alternative A has a present value of P2,722.76 using the annuity formula, Alternative B has a present value of P2,856.40 using the present value of a perpetuity formula. The single amount alternatives are Alternative A of P2,825 and Alternative B of P2,800. For Problem 2, the present value of Proposal 1 which has uneven cash flows is P104,508 using the present value of a perpetuity formula and annuity formula. Proposal 2 is a single payment of P100,000 at time 0

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47 views

Time Value of Money Problems Single and Mixed Streams

The document provides solutions to problems involving the time value of money for single and mixed cash flows. For Problem 1, the summaries are: Mixed stream Alternative A has a present value of P2,722.76 using the annuity formula, Alternative B has a present value of P2,856.40 using the present value of a perpetuity formula. The single amount alternatives are Alternative A of P2,825 and Alternative B of P2,800. For Problem 2, the present value of Proposal 1 which has uneven cash flows is P104,508 using the present value of a perpetuity formula and annuity formula. Proposal 2 is a single payment of P100,000 at time 0

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dorothyannvillamoraa
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© © All Rights Reserved
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SOLUTION TO THE PROBLEMS ON TIME VALUE OF MONEY (SINGLE/MIXED STREAMS)

Problem 1.
Mixed Stream
Alternative A
Since the amount of cash flow received is uniformly received at the end of each year for 5
years, the formula to be use is present value of an annuity.
1 – (1+i)-n 1 – (1.09) -5
Formula is: PV/A = CF -------------- A = -----------------
i .09

= 700 ( 3.889651263)
= P2.722.76
Alternative B , the cash flow is uneven, thus the formula to be use is PV = (1+i) )-n

End of Year CF PV factor @ 9% PV (P)


1 P1100 0.91743… P1.009.17
2 900 0. 841679… 757.51 ..
3 700 0.772183… 540.53
4 500 0.708425… 354.21
5 300 0.649931… 194.98
TPV P2,856.40
Single Amount

Alternative A at time 0 P2,825


Allternative B at time 0 P2,800

Summary Mixed ALT- A P2.722.76 ALT -B P2.856.40


Single ALT- A P2,825 ALT B P2,800

Decision: Mixed Alternative B . since this option has the biggest benefit
among them ( P2.856.40)

Problem 2. – Solution
2.1. Proposal 1:
30.000 25,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 10.000
______|______|_____|______|______|_____|_____|______|_____|______|
0 1 2 3 4 5 6 7 8 9 10

Proposal 2 - P100,000 (at point 0)


2.2. is computed as follows:

Year CF PV factor @ 12% PV (P)


1 P30000 0.892857… P26786
2 25000 0.797193… 19930
3 15000 0.711780… 10677
4 15000 0.635518… 9533
5 15000 0.567426… 8511
6 15000 0.50.6631… 7599 54572
7 15000 0.452349… 6785
8 15000 0.403883… 6058
9 15000 0.360610… 5409
10 10000 0.321973… 3220
TPV P104508
Another way of finding PV since , there are CF which are even for years 3-9, then using the
annuity formula , it can be computed as follows:

1 – (1.12) -9 = 5.328249792 - 1 – (1.12) -2 1.69005102 = 3.638198772


.12 .12

Therefore, the PV of an annuity of 7 @ 12% is P15,000 (3.638198772) = P54573.


Summary would be

Year PV (P)
1 P 26786
2 19930
3- 9 54573
10 3220
P 104509
Note: there is a difference of P1 due to rounding

2.3. The offer to be accepted is first one with a present value of P104,508 than the
P100,000 assuming this amount is material (difference in amount)
2.4.

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