In: Finance
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 |
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 |