Question

1. Suppose that one year from now you receive $450. At the end of the next nine years you receive a payment that is 2% larger than the prior year. If the cost of capital is 11% what is this stream of cash flows worth today?

2. Suppose that one year from now you will receive $400 and that at the end of every year thereafter you will receive a payment that is 1% larger than the prior payment. If the cost of capital is 12% what is this stream of cash flows worth today?

3. Suppose that one year from now you will receive $400. At the end of each of the next four years you will receive a payment that is 3% bigger than the prior payment. Following year five you will receive a payment at the end of every year that is 1% larger than the prior payment. If the cost of capital is 7% what is the this stream of cash flows worth today?

Answer 1

1.

	11.00%
Cash flows	Year	Discounted CF
-	0	0.00
450.00	1	405.41
459.00	2	372.53
468.18	3	342.33
477.54	4	314.57
487.09	5	289.07
496.84	6	265.63
506.77	7	244.09
516.91	8	224.30
527.25	9	206.11
537.79	10	189.40

present worth = 2,853.45

2.

worth of this infinite cash flow = 400/(0.12 - 0.01) = 3,636.36

3.

	7.00%
Cash flows	Year	Discounted CF
-	0	0.00
400.00	1	373.83
412.00	2	359.86
424.36	3	346.40
437.09	4	333.45
450.20	5	320.99
7,578.43	5	5403.31

present worth = 7,137.85