Question

In: Finance

5. Present value To find the present value of a cash flow expected to be paid...

5. Present value

To find the present value of a cash flow expected to be paid or received in the future, you will the future value cash flow by (1 + I)NN.

What is the value today of a $12,000 cash flow expected to be received eight years from now based on an annual interest rate of 6%?

$9,411

$6,023

$11,670

$7,529

Your broker called earlier today and offered you the opportunity to invest in a security. As a friend, she suggested that you compare the current, or present value, cost of the security and the discounted value of its expected future cash flows before deciding whether or not to invest. The decision rule that should be used to decide whether or not to invest should be:

Everything else being equal, you should invest if the discounted value of the security’s expected future cash flows is greater than or equal to the current cost of the security.

Everything else being equal, you should invest if the present value of the security’s expected future cash flows is less than the current cost of the security.

Everything else being equal, you should invest if the current cost of the security is greater than the present value of the security’s expected future cash flows.

Now that you’ve thought about the decision rule that should be applied to your decision, apply it to the following security offered by your broker:

Jing Associates, LLC, a large law firm in Denver, is building a new office complex. To pay for the construction, Jing Associates is selling a security that will pay the investor the lump sum of $6,750 in five years. The current market price of the security is $5,896.

Assuming that you can earn an annual return of 3.75% on your next most attractive investment, how much is the security worth to you today?

$7,019

$5,334

$5,615

From strictly a financial perspective, should you invest in the Jing security?

Yes

No

Why or why not?

Because the cost (market value) of the security is greater than the discounted value of the security’s future cash flows.

Because the discounted value of the security’s future cash flows is greater than the cost of the security.

Expert Solution

jeff jeffy answered 1 year ago

The present value of a perpetuity, with the first cash flow paid in 5 years’ time,...

The present value of a perpetuity, with the first cash flow paid in 5 years’ time, is equivalent to the present value of $150,000 that is to be paid in 14 years’ time. The perpetuity and the lump sum have a required rate of return of 10%. What is the annual cash flow associated with the perpetuity? a. 6,361.46 b. 5,783.15 c. 6,997.61 d. 7697.37 e. None of above

The present value of a perpetuity, with the first cash flow paid in 4 years time,...

The present value of a perpetuity, with the first cash flow paid in 4 years time, is equivalent to receiving $100,000 in 15 years time. The perpetuity and the lump sum are of equivalent risk and have a required rate of return of 10%. What is the annual cash flow associated with the perpetuity?

Problem 5-18 Uneven cash flow stream Find the present values of the following cash flow streams...

Problem 5-18 Uneven cash flow stream Find the present values of the following cash flow streams at a 3% discount rate. Round your answers to the nearest cent. 0 1 2 3 4 5 Stream A $0 $100 $450 $450 $450 $300 Stream B $0 $300 $450 $450 $450 $100 Stream A $ Stream B $ What are the PVs of the streams at a 0% discount rate? Stream A $ Stream B $

1. Find the present value of the following cash flow stream with an interest rate of...

1. Find the present value of the following cash flow stream with an interest rate of 7%: Year 1 = $2,000 Year 2 = $4,000 Year 3 = $1,000 Year 4 = $6,000 2. Find the present value of the following ordinary annuity: $800 per year for 10 years at 6% 3. If you invest $5,000 in an investment which has an annual return of 10% but compounds every 6 months (instead of yearly), how much will it have after...

Find the present value of the following cash flow stream if the discount rate is 7.17%:...

Find the present value of the following cash flow stream if the discount rate is 7.17%: CF1 = 24, CF2 = 41, CF3 = 51, CF4 = 69. The cash flows are received at the end of each year. Round to the nearest $0.01 (e.g., if your answer is $175.386, record it as 175.39).

Find the present value of $1000 paid at the end of each month for 5 years...

Find the present value of $1000 paid at the end of each month for 5 years at 12% compounded semi-annually If possible, please use in terms of a financial calculator

1. Find the present value as of year 0 of the following cash-flow stream if investments...

1. Find the present value as of year 0 of the following cash-flow stream if investments of similar risk are yielding 8% Year Cash Flow 0 through 14 $8,000 per year in each of those years 2. Find the present value as of year 0 of the following cashflow stream if investments of similar risk are yielding 8.25% Year Cash Flow 6 through 28 $8,000 per year in each of those years

Find the present value of the following cash flow stream assuming a discount rate of 8%:...

Find the present value of the following cash flow stream assuming a discount rate of 8%: A payment of $10,000 received at the end of each MONTH over the coming 4 years, followed by a payment of $5000 received at the end of each MONTH over the 6 years after that. a.) $556,975.15 b.) $409,619.13 c.) $285,172.61 d.) $207,297.84 e.) $616,916.97

Find the present values of the following cash flow streams at a 5% discount rate. Do...

Find the present values of the following cash flow streams at a 5% discount rate. Do not round intermediate calculations. Round your answers to the nearest cent. 0 1 2 3 4 5 Stream A $0 $150 $450 $450 $450 $300 Stream B $0 $300 $450 $450 $450 $150 Stream A: $ Stream B: $ What are the PVs of the streams at a 0% discount rate? Round your answers to the nearest dollar. Stream A: $ Stream B: $

UNEVEN CASH FLOW STREAM a.)Find the present values of the following cash flow streams at a...

UNEVEN CASH FLOW STREAM a.)Find the present values of the following cash flow streams at a 4% discount rate. Round your answers to the nearest cent. 0 1 2 3 4 5 Stream A $0 $100 $400 $400 $400 $250 Stream B $0 $250 $400 $400 $400 $100 Stream A $ ________ Stream B $ ________ b.)What are the PVs of the streams at a 0% discount rate? Stream A $ ________ Stream B $ ________ *Please show how to...