Question

In: Finance

An investment pays $2,500 per year for the first 4 years, $5,000 per year for the...

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

Solutions

Expert Solution

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

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