Question

In: Economics

You are given an opportunity to invest in a scheme that will pay you 3 end-of-period...

You are given an opportunity to invest in a scheme that will pay you 3 end-of-period cash flows at the end of years 3, 4, 5 and another three cash flows at the end of years 8, 9, 10. You require 12% APR compounded monthly as your MARR. What is the most you are willing to pay for this opportunity? A = $1000 in all cases.

a) Show your cash flow diagram from your standpoint.

b)Show your equivalence equation in terms of equivalence factors that will solve this problem.

c)Find the most you are willing to pay for this opportunity by filling in the factor values and solving for you purchase amount.

Expert Solution

a.

CFD

b.

Effective interest rate = (1+0.12 / 12)^12 -1

= (1+0.01)^12 -1

= (1.01)^12 -1

= 0.126825 ~ 12.6825%

Present Value = 1000*(P/A,12.6825%,3)*((P/F,12.6825%,2) + (P/F,12.6825%,7))

c.

Purchase amount = 1000*(P/A,12.68%,3)*((P/F,12.68%,2) + (P/F,12.68%,7))

= 1000*(((1 + 0.126825)^3-1)/(0.126825*(1 + 0.126825)^3))*(((1 + 0.126825)^-2) + ((1 + 0.126825)^-7))

= 1000*(((1.126825)^3-1)/(0.126825*(1.126825)^3))*(((1.126825)^-2) + ((1.126825)^-7))

= 1000*2.373940 *(0.787566 + 0.433516)

= 2898.78

Rahul Sunny answered 2 years ago

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