Question
Using Formula OR Excel function. For problems 5 & 6 use required nominal annual return: 10.00%...
Using Formula OR Excel function.
| For problems 5 & 6 use required nominal annual return: | 10.00% | |||
| 5. Consider the following end-of-year cash flows: | ||||
| Year | Cash flow | |||
| 0 | $0.00 | |||
| 1 | $40.00 | |||
| 2 | $60.00 | |||
| 3 | $60.00 | |||
| Present Value | ||||
| a. What is the present value of these cash flows (in year 0)? | ||||
| 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). | ||||
| Present Value | ||||
| 6a. What is the present value of $1,000,000, due 25 years from now? | ||||
| b. What is the present value of a $40,000 ordinary annuity for 25 years? | ||||
| c. What is the present value of a $40,000 perpetuity, if the first payment is 1 year from now? | ||||
| d. What is the present value of a $40,000 perpetuity, if the first payment is now? | ||||
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Answer #1
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