A series of cash flows may not always necessarily be an annuity. Cash flows can also be uneven and variable in amount, but the concept of the time value of money will continue to apply. Consider the following case: The Purple Lion Beverage Company expects the following cash flows from its manufacturing plant in Palau over the next six years: Year 1 $400,000 Year 2 $20,000 Annual Cash Flows Year 3 $180,000 Year 4 $300,000 O $600,000 O $1,975,000 O $1,395,097 O $1,775,000 Year 5 Year 6 $350,000 $725,000 The CFO of the company believes that an appropriate annual interest rate on this investment is 9%. What is the present value of this uneven cash fle stream, rounded the nearest whole dollar? Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments: Description Debbie has been donating 10% of her salary at the end of every year to charity for the last three years. Her salary increased by 15% every year in the last three years. You deposit a certain equal amount of money every year into your pension fund. Amit receives quarterly dividends from his investment in a high-dividend yield, index exchange-traded fund. Aakash borrowed some money from his friend to start a new business. He promises to pay his friend $2,650 every year for the next five years to pay off his loan along with interest. Uneven Cash Flows O DO O Annuity Payments O O O

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter3: International Financial Markets

Section: Chapter Questions

Problem 3BIC

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A series of cash flows may not always necessarily be an annuity. Cash flows can also be uneven and variable in amount, but the concept of the time
value of money will continue to apply.
Consider the following case:
The Purple Lion Beverage Company expects the following cash flows from its manufacturing plant in Palau over the next six years:
Year 1
$400,000
Year 2
$20,000
Annual Cash Flows
Year 3 Year 4
$180,000 $300,000
O $600,000
O $1,975,000
O $1,395,097
O $1,775,000
Year 5
$350,000
Year 6
$725,000
The CFO of the company believes that an appropriate annual interest rate on this investment is 9%. What is the present value of this uneven cash flow
stream, rounded to the nearest whole dollar?
Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments:
Description
Debbie has been donating 10% of her salary at the end of every year to charity for the last three years. Her
salary increased by 15% every year in the last three years.
You deposit a certain equal amount of money every year into your pension fund.
Amit receives quarterly dividends from his investment in a high-dividend yield, index exchange-traded fund.
Aakash borrowed some money from his friend to start a new business. He promises to pay his friend $2,650
every year for the next five years to pay off his loan along with interest.
Uneven Cash
Flows
O
O
O
Annuity
Payments
O
O

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An annuity is a payment series that pays a periodic sum to the holder. It is extensively used in retirement and insurance accounts. The concept of TVM is used to calculate the PV or the FV of the account.

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