Use the following table of cash flows to answer parts (a)-(c). Assume an 8 percent discount rate.
|
End of Year
|
Cash Flow
|
|
1
|
$ 10,000
|
|
2
|
10,000
|
|
3
|
10,000
|
|
4
|
12,000
|
|
5
|
12,000
|
|
6
|
12,000
|
|
7
|
12,000
|
|
8
|
15,000
|
|
9
|
15,000
|
|
10
|
15,000
|
a. Solve for the present value of the cash flow stream by summing the present value of each individual cash flow.
b. Solve for the present value by summing the present value of the three separate annuities (one current and two deferred).
c. Which method is better for a long series of cash flows with embedded annuities?