Bobby is thinking of buying a minature golf course. It isexpected to generate cash flows...

Bobby is thinking of buying a minature golf course. It is expected to generate cash flows of $40,000 per year in years one through four and $50,000 per year in years five through either. If the appropriate discount rate is 10%, what is the most Bobby should pay for the investment?

Solutions

Expert Solution

We will discount the given cash flows using the 10% rate to find the maximum amount Bobby should pay for the investment.

PV = future cash flows/(1+i)^n

PV = $40,000/(1.10) + $40,000/(1.10)^2 + $40,000/(1.10)^3 + $40,000/(1.10)^4 + $50,000/(1.10)^5 + $50,000/(1.10)^6 + $50,000/(1.10)^7 + $50,000/(1.10)^8

PV = $235,047.6554

The maximum Bobby should pay for the investment is $235,047.6554.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

An investment, which has an expected return of 9.5%, isexpected to make annual cash flows...

An investment, which has an expected return of 9.5%, is expected to make annual cash flows forever. The first annual cash flow is expected in 1 year and all subsequent annual cash flows are expected to grow at a constant rate of 2.5% per year. We know that the cash flow expected in 1 year from today is expected to be $5,400. What is the present value (as of today) of the cash flow that is expected to be made...

Duffer Resorts is redoing its golf course at a cost of $2,744,320. It expects to generate...

Duffer Resorts is redoing its golf course at a cost of $2,744,320. It expects to generate cash flows of $1,223,445, $2,007,812, and $3,147,890 over the next three years. If the appropriate discount rate for the firm is 13 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.) PLEASE SHOW WORK!

3. Bobby and Sylvia are buying a house. They have applied for a $215,000 mortgage at...

3. Bobby and Sylvia are buying a house. They have applied for a $215,000 mortgage at two companies: a. Company 1: (Canwee, Cheatum and Howe) lasting 30 years at 3.99% interest. b. Company 2: (How, Wei, Ripum and Off) lasting 25 years at 3.67% interest. c. Determine their monthly payment from each company d. How much principal and interest will be paid for the first payment from each company? e. Which is the better deal?

An investment is expected to generate annual cash flows forever. The first annual cash flow is...

An investment is expected to generate annual cash flows forever. The first annual cash flow is expected in 1 year and all subsequent annual cash flows are expected to grow at a constant rate annually. We know that the cash flow expected in 3 years from today is expected to be $9,000 and the cash flow expected in 7 years from today is expected to be $10,000. What is the cash flow expected to be in 5 years from today?

An investment is expected to generate annual cash flows forever. The first annual cash flow is...

An investment is expected to generate annual cash flows forever. The first annual cash flow is expected in 1 year and all subsequent annual cash flows are expected to grow at a constant rate annually. We know that the cash flow expected in 2 year(s) from today is expected to be 1,860 dollars and the cash flow expected in 8 years from today is expected to be 3,140 dollars. What is the cash flow expected to be in 5 years...

Corporation has a project with the initial cost of $150. It will generate the cash flows...

Corporation has a project with the initial cost of $150. It will generate the cash flows of $50, $100, and $150 in years 1, 2 and 3, respectively, which is the internal rate of return (IRR) of project?

What is the value of a building that is expected to generate fixed annual cash flows...

What is the value of a building that is expected to generate fixed annual cash flows of $13,800 every year for a certain amount of time if the first annual cash flow is expected in 4 years from today, the last annual cash flow is expected in 8 years from today, and the appropriate discount rate is 6.8%? A. 36,091 B. 43,725 C. 38,545 D. 46,678 E. None of the above is within $20 of the correct answer

A company is forecasted to generate free cash flows of $45million for the next three...

A company is forecasted to generate free cash flows of $45 million for the next three years. After that, cash flows are projected to grow at a 2.5% annual rate in perpetuity. The company's cost of capital is 12.3%. The company has $66 million in debt, $7 million of cash, and 13 million shares outstanding. What's the value of each share?

A project requires $1000 to be invested today, and is expects to generate cash flows in...

A project requires $1000 to be invested today, and is expects to generate cash flows in the future years: CF1=$500, CF2=$400, CF3=$200. What is the REGULAR payback period of this project? a) 2.5 years b) 3 years c) 1.25 years d) 0.5 years e) Never pay back the cost

a project with an initial cost of $73,600 is expected to generate annual cash flows of...

a project with an initial cost of $73,600 is expected to generate annual cash flows of $16,360 for the next 8 years. what is the projects internal rate of retu

Subjects