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In: Finance

You are considering the purchase of an investment that would pay you $55 per year for...

You are considering the purchase of an investment that would pay you $55 per year for Years 1-4, $30 per year for Years 5-7, and $68 per year for Years 8-10. If you require a 14 percent rate of return, and the cash flows occur at the end of each year, then how much should you be willing to pay for this investment? Show your answer to the nearest $.01. Do not use the $ sign in your answer.

Solutions

Expert Solution

Willing to pay = Present value of cash inflows

Present value of first set of cash inflows = Annuity * [1 - 1 / (1 + r)n] /r

Present value of first set of cash inflows = 55 * [1 - 1 / (1 + 0.14)4] / 0.14

Present value of first set of cash inflows = 55 * 2.91371

Present value of first set of cash inflows = 160.2542

Present value of second set of cash flows = {Annuity * [1 - 1 / (1 + r)n] /r} / (1 + r)n

Present value of second set of cash flows = {30 * [1 - 1 / (1 + 014)3] /0.14} / (1 + 0.14)4

Present value of second set of cash flows = {30 * 2.32163} / 1.68896

Present value of second set of cash flows = 41.23774

Present value of third set of cash flows = {Annuity * [1 - 1 / (1 + r)n] /r} / (1 + r)n

Present value of third set of cash flows = {68 * [1 - 1 / (1 + 014)3] /0.14} / (1 + 0.14)7

Present value of third set of cash flows = {68 * 2.32163} / 2.50227

Present value of third set of cash flows = 63.0911

Willing to pay = 160.2542 + 41.23774 + 63.0911

Willing to pay = 264.58

jeff jeffy answered 1 year ago
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