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In: Accounting

You invest in a project that will pay you $500 per year for 5 years and then pays $750 per year for the following 10 years

You invest in a project that will pay you $500 per year for 5 years and then pays $750 per year for the following 10 years (assume that all payments are made at the end of the year). You require a 6% rate of return on this type of investment. Give your return requirement, what is the maximum amount that you would be willing to pay today for the cash flow stram associated with this project? Round only your final answer to the colsest dollar.

• 5,344

• 6,839

• 8,750

• $5,444

• $6,231

Solutions

Expert Solution

The option (5) is the right option.

 

Explanation:

Present value of cash flows (annual payment for 5 years*PVAF At 6% for 5 years)+(annual payment at year 6 to 16 years*PVAF for next 10 years) (500*4.2123)+(750*5.4998) 6231.00  
present value annuity factor at 6% for 15 Years 1-(1+r)^-n /rate 1-(1+6%)^-15 / 6% .58273/6% 9.712166667
present value annuity factor at 6% for 5 Years 1-(1+r)^-n /rate 1-(1+6%)^-5 / 6% .25274/6% 4.212333333
present value of annuity (year 6 to 15) 9.7121-4.2123     5.4998
option is (5) 6,231      

 

The option (5) is the right option.

Junaid answered 1 year ago
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