Present Value Mixed Streams?

Question

How can you compare the calculated PV in light of the fact that the undiscounted cash flow totals $150,000 in each case?????

15%
Cash Flow Stream
year a b
1 ............. 50,000 ..........10,000
2 ..............40,000 .......... 20,000
3 ............ 30,000.......... 30,000
4 ............ 20,000 .......... 40,000
5 ..............10,000 .......... 50,000

Totals ..150,000 ........ 150,000

For "A" using financial tables total NPV is $109,856.33 and using Excel an function the total NPV is $109,856.33

For "B" using financial tables total NPV is $91,290.00 and using Excel an function the total NPV is $91,272.98

HELP!!!!!

Answer 1

you have answered your question. You compare $109.9K vs $91.3K. Given the choice you would select Option A as this yields the higher result, reflecting the fact that you have a higher amount of $$ in the early period of the cash flow stream.

Answer 2

NPV of A is larger so it is a better investment. The rational is more money accumulates earlier and you can reinvestment them at other rates of returns. It has higher cash inflows at the early stages than B. So your reinvestment rate of return can also go up. The second part of this question I answered yesterday. Reinvestment rate of return is something like the Bond Duration.