For problems 5 & 6 use required nominal annual return: 10.00% 5. Consider the following end-of-year...

For problems 5 & 6 use required nominal annual return:			10.00%
5. Consider the following end-of-year cash flows:
Year	Cash flow		0
0	$0.00
1	$40.00
2	$60.00
3	$60.00
			Present Value
a. What is the present value of these cash flows (in year 0)?			$0.00

b. If the purchase price of this investment is $140 today, would you buy it? Why?
(Compare instrinsic value to actual price)







c. What is the expected rate of return on this investment if the purchase price is $140?
Year	Cash flow	Internal Rate of Return
0	-$140.00
1	$40.00
2	$60.00
3	$60.00

d. Would you buy this investment based on your answer to part c. and why?
(Compare expected return to required return).

Solutions

Expert Solution

Solution:-

A. To calculate Present Value of Cash Flows-

Present Value of Cash flows = $131.03

If Purchase price of this Investment is $140 today we not buy because Investment is overvalued.

C. To calculate Expected Rate of Return-

Expected Rate of Return is 6.55%

We are not buy because Expected Rate of Return of the Investment is lower than companies discount Rate.

If you have any query related to question then feel free to ask me in a comment.Thanks.

jeff jeffy answered 1 year ago

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