Well explore the case of mixed streams of cash flows

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Unformatted text preview: nnuity is similar to the method just discussed. There are long and short methods for making this calculation. EXAMPLE Time line for present value of an ordinary annuity ($700 endof-year cash flows, discounted at 8%, over 5 years) Braden Company, a small producer of plastic toys, wants to determine the most it should pay to purchase a particular ordinary annuity. The annuity consists of cash flows of $700 at the end of each year for 5 years. The firm requires the annuity to provide a minimum return of 8%. This situation is depicted on the following time line: 0 1 2 $700 $700 End of Year 3 $700 4 5 $700 $700 $ 648.20 599.90 555.80 514.50 476.70 Present Value $2,795.10 Table 4.2 shows the long method for finding the present value of the annuity. This method involves finding the present value of each payment and summing them. This procedure yields a present value of $2,795.10. CHAPTER 4 TABLE 4.2 Time Value of Money 147 The Long Method for Finding the Present Value of an Ordinary Annuity Year (n) Cash flow (1) PVIF8%,...
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