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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?

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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 2 years ago
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