Question

Assume you are offered an investment that will pay you $3,000 at time 0. For year 1 the

cash inflow will be $1,000 and then will decline at a rate of 20% per year for 30 years, that is,

each year after year 1 will be 80% of the prior year through 30 years. If the required rate of

return is 14%, what is the value of this stream of cash flows, including the value received today?

Use equations or HP 10bll+ to answer. Do not use Excel.

Answer 1

The present value if the value of cash flows discounted at 14%

Present value = 3000 + 1000*((0.8^0)/(1.14^1)) + 1000*((0.8^1)/(1.14^2)) + 1000*((0.8^2)/(1.14^3)) .... upto 30 terms

Applying geometric progression sum,

Present value = 3000 + 1000*((0.8^0)/(1.14^1))*((1-(0.8/1.14)^30))/(1-(0.8/1.14)))

Present value = $5941.11