Part 1. You are offered an investment which will pay you $300 in 1 year, $350...

Part 1. You are offered an investment which will pay you $300 in 1 year, $350 in 2 years, $350 in 3 years and $300 in 4 years. Your required rate of return is 9%. What is the most that you should be willing to pay for the investment?

Part 2. Calculate the value of the stream of cash flows below in Year 3.

t=0--->CF0 = $450

t=1--->CF1 = $550

t=2--->CF2 = $650

t=3--->CF3 = $750

t=4--->CF4 = $850

The relevant rate is 9%. (Enter only numbers and decimals in your response. Round to 2 decimal places.)

Solutions

Expert Solution

Part 1:
PV = 300/1.09+350/1.09^2+350/1.09^3+300/1.09^4 =	$ 1,052.61
Part 2:
Note:
The question is silent on whehter it is value at the
beginning of year 3 or end of year 3.
If it is beginning of year 3, value = 4501.09^2+5501.09+650+750/1.09+850/1.09^2 =	$ 3,187.65
If it is end of year 3, value = 4501.09^3+5501.09^2+650*1.09+750+850/1.09 =	$ 3,474.53

jeff jeffy answered 2 years ago

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