Final answer:
To find the present values of Stream A and Stream B cash flow streams at a 5% discount rate, discount each future amount back to its present value and then sum them up. Both streams have the same present value of $1,800 at a 0% discount rate.
Step-by-step explanation:
Present Value Calculations at 5% Discount Rate
To find the present values (PV) of Stream A and Stream B at a 5% discount rate, each future cash flow is discounted back to its present value using the formula PV = FV / (1 + r)n, where PV is the present value, FV is the future value, r is the discount rate, and n is the number of periods.
Here's the calculation for Stream A:
Year 1: PV = $150 / (1 + 0.05)1 = $142.86
Year 2: PV = $450 / (1 + 0.05)2 = $408.16
Year 3: PV = $450 / (1 + 0.05)3 = $388.77
Year 4: PV = $450 / (1 + 0.05)4 = $370.26
Year 5: PV = $300 / (1 + 0.05)5 = $233.65
Adding these up gives the total present value for Stream A
Now, let's calculate Stream B:
Year 1: PV = $300 / (1 + 0.05)1 = $285.71
Year 2: PV = $450 / (1 + 0.05)2 = $408.16
Year 3: PV = $450 / (1 + 0.05)3 = $388.77
Year 4: PV = $450 / (1 + 0.05)4 = $370.26
Year 5: PV = $150 / (1 + 0.05)5 = $116.82
Adding these up gives the total present value for Stream B.
At a 0% discount rate, the present values of the streams are simply the sum of the cash flows, as no discounting is necessary.
Stream A: PV = $0 + $150 + $450 + $450 + $450 + $300 = $1,800
Stream B: PV = $0 + $300 + $450 + $450 + $450 + $150 = $1,800