Question

An investment pays $2,500 per year for the first 4 years, $5,000 per year for the next 3 years, and $7,500 per year the following 9 years (all payments are at the end of each year). If the discount rate is 11.85% compounding quarterly, what is the fair price of this investment?

Work with 4 decimal places and round your answer to two decimal places. For example, if your answer is $345.667 round as 345.67 and if your answer is .05718 or 5.718% round as 5.72.

Group of answer choices

$31,750.35

$33,694.25

$26,566.62

$39,201.97

$32,398.32

Answer 1

Ans $32,398.32

EAR =	( 1 + r )^n - 1
	Compounded Quarterly
EAR=	( 1 + 11.85%/4)^4 - 1
EAR=	12.3870614417%

Year	Project Cash Flows (i)	DF@ 12.39%	DF@ 12.39% (ii)	PV of Project ( (i) * (ii) )
1	2500	1/((1+12.39%)^1)	0.890	2,224.46
2	2500	1/((1+12.39%)^2)	0.792	1,979.28
3	2500	1/((1+12.39%)^3)	0.704	1,761.13
4	2500	1/((1+12.39%)^4)	0.627	1,567.02
5	5000	1/((1+12.39%)^5)	0.558	2,788.61
6	5000	1/((1+12.39%)^6)	0.496	2,481.26
7	5000	1/((1+12.39%)^7)	0.442	2,207.78
8	7500	1/((1+12.39%)^8)	0.393	2,946.66
9	7500	1/((1+12.39%)^9)	0.350	2,621.89
10	7500	1/((1+12.39%)^10)	0.311	2,332.91
11	7500	1/((1+12.39%)^11)	0.277	2,075.78
12	7500	1/((1+12.39%)^12)	0.246	1,846.99
13	7500	1/((1+12.39%)^13)	0.219	1,643.42
14	7500	1/((1+12.39%)^14)	0.195	1,462.29
15	7500	1/((1+12.39%)^15)	0.173	1,301.12
16	7500	1/((1+12.39%)^16)	0.154	1,157.71
		PV		32,398.32