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

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

jeff jeffy answered 2 years ago

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