Question

10. You are offered an annuity that will pay you $200,000 once per year, at the end of the year, for 25 years. The first payment will arrive one year from now. The last payment will arrive twenty five years from now. Suppose your annual discount rate is ?? = 5.25%, how much are you willing to pay for this annuity? (hint: this is the same as the present value of an annuity.)

11. You would like to develop an office building. Your analysts forecast that it will cost you $1,000,000 immediately (time 0), and it will cost you $500,000 in one year (time 1). They forecast you can sell the building for $2,400,000 in two years (time 2). If your discount rate is ?? = 25%, what is the net present value of this investment?

12. What is the IRR of the project in question 12? (hint: if you are using an ordinary calculator, all you need to do is to solve a quadratic equation).

Answer 1

10. FV = 0, PMT = 200,000, N = 25, rate = 5.25%

use PV function in Excel

price = 2,749,494.00

11.

Discount rate	25.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(1,000,000.000)	0	(1,000,000.00)	(1,000,000.00)
(500,000.000)	1	(400,000.00)	(1,400,000.00)
2,400,000.000	2	1,536,000.00	136,000.000

NPV = 136,000.00

12.

Use IRR function in Excel

IRR = 31.92%