Question

In: Finance

1. Your father paid $10,000 (CF at t = 0) for an investment that promises to...

1. Your father paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 6 years, then an additional lump sum payment of $10,250 at the end of the 5th year. What is the expected rate of return on this investment?

a.

6.75%

b.

8.65%

c.

22.39%

d.

7.84%

e.

6.53%

2. What is the value of the following cash flow stream at the end of Year 2 at a rate of 10.0%?

Years:

0

1

2

3

CFs:

$750

$2,450

$3,175

$5,400

a.

$10,866.57

b.

$10,777.50

c.

$11,686.59

d.

$7,749.11

e.

$10,907.56

Solutions

Expert Solution

Ans 1) We have to use financial calcualtor to solve this
put in calculator
Fv 10250
PV -10000
PMT 750
N 6
Compute I 7.84%
Ans is option d) 7.84%
Ans 2)
We have to move all the cash flow at 2nd year end value using future value and present value formula
i ii iii=i+ii
Year Cash flow Future value Present value Value at year 2
0 750 907.50 =750*(1+10%)^2 907.5
1 2450 2695.00 =2450*(1+10%)^1 2695
2 3175 3175.00 =3175 3175
3 5400           4,909.09 5400/(1+10%) 4909.091
11686.59
Ans is option c) =          11,686.59

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