A. Find the present values of the following cash flow streams. The appropriate interest rate is 9%. Year            
    Cash  Stream A Cash Stream B
1 $100 $300
2 400 400
3 400 400
4 400 400
5 300 100

b. What is the value of each cash flow stream at a 0% interest rate?

a.

PV - Stream A = $1215.638009 rounded off to $1215.64

PV - Stream B = $1269.13797 rounded off to $1269.14

b.

PV - Stream A = $1600

PV - Stream B = $1600

Explanation:

a.

The present value of a series or stream of cash flows can be calculated using the following formula,

PV of Cash flow = CF1 / (1+i)  +  CF2 / (1+i)^2  +  ...  +  CFn / (1+i)^n

Where,

PV - Stream A = 100 / (1+0.09)  +  400 / (1+0.09)^2  +  400 / (1+0.09)^3  +  

400 / (1+0.09)^4  +  300 / (1+0.09)^5

PV - Stream A = $1215.638009 rounded off to $1215.64

PV - Stream B = 300 / (1+0.09)  +  400 / (1+0.09)^2  +  400 / (1+0.09)^3  +  

400 / (1+0.09)^4  +  100 / (1+0.09)^5

PV - Stream B = $1269.13797 rounded off to $1269.14

b.

When the interest rate is zero, the present value of cash flows remain the same as their absolute values. Thus, the PV of cash flow streams A and B at 0% interest rate is,

PV - Stream A = 100 + 400 + 400 + 400 + 300

PV - Stream A = $1600

PV - Stream B = 300 + 400 + 400 + 400 + 100

PV - Stream B = $1600

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