An asset pays a cash flow of 100,000 in 1 year and 150,000 in 2 years....

An asset pays a cash flow of 100,000 in 1 year and 150,000 in 2 years. The discount rate is 4% for each. You have a 2-year horizon and the reinvestment rate one year from today is (expected to be) 5%. What is your (expected) Rate-of-Return? (Please show all work)

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Expert Solution

Price paid=Present value of cash flows=100000/1.04+150000/1.04^2=234837.2781

Future value of cash flows considering reinvestment=100000*1.05+150000=255000

ROR=(Future Value/Price paid)^(1/n)-1=(255000/234837.2781)^(1/2)-1=4.2045%

jeff jeffy answered 1 year ago

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