Question

The CFO of the company believes that an appropriate annual interest rate on this investment is 4%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar?

$1, 625,000
$1, 685, 335
$1, 975,000
$600,000
Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments:
Description Uneven Cash Flows Annuity You recently moved to a new apartment and signed a contract to pay monthly rent to your landlord for a year.
SOE Corp. hires an average of 10 people every year and matches the contribution of each employee toward his or her retirement fund.
Franklinia Venture Capital (FVC) invested in a budding entrepreneur's restaurant. The restaurant owner promises to pay FVC 10% of the profit each month for the next 10 years.
You have committed to deposit $600 in a fixed interest-bearing account every quarter for four years.

Answer 1

Present value of the cash flows = $1,625,000 /1.04 + $1,685,335/1.04 + $1,975,000/1.04 + $600,000/1.04 = $5,389,337.27

You recently moved to a new apartment and signed a contract to pay monthly rent to your landlord for a year. ⇒ ANNUITY

SOE Corp. hires an average of 10 people every year and matches the contribution of each employee toward his or her retirement fund. ⇒ UNEVEN CASH FLOW (EACH EMPLOYEE'S SALARY VARIES, SO THE TOTAL EXPENSE ALSO VARIES)

Franklinia Venture Capital (FVC) invested in a budding entrepreneur's restaurant. The restaurant owner promises to pay FVC 10% of the profit each month for the next 10 years. ⇒ UNEVEN CASH FLOW (PROFITS ARE NOT IDENTICAL FORM ONE PERIOD TO ANOTHER)

You have committed to deposit $600 in a fixed interest-bearing account every quarter for four years. ⇒ ANNUITY