You are considering an investment that will pay you $1,200 in one year, $1,400 in two...

You are considering an investment that will pay you $1,200 in one year, $1,400 in two years, and $1,600 in three years, $1,800 in four years, and $11,000 in five years. All payments will be received at the end of the year. • Your opportunity cost of capital (r ) is 10.5% • Using the present value formula calculate the present value of each of the cash flows by 1. Discounting cash flows using annual compounding 2. Discounting cash flows using monthly compounding 3. Discounting cash flows using continuous compounding • How much would you be willing to pay for the investment using each of the three different compounding scenarios? That is, what is the present value of the cash flows from the investment using each of the three different compounding scenarios? • Which of the three present values is the largest (annual, monthly or continuously compounded returns)? Please explain why this is the case. do not use a calculator or excel to solve

Solutions

Expert Solution

The compounding interest rates have been taken to calculate the discounted values.

And as we all know the value of "e" is 2.7183 which you can see in the solution used for continuous compunding.

Pardon me for the strike offs and overwriting in the solution sheet i have written. I am sure you will understand the solution. Kindly revert back if there are any issues.

jeff jeffy answered 1 month ago

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