Question

You have been offered the opportunity to purchase one of two select financial products by your...

You have been offered the opportunity to purchase one of two select financial products by your favorite Northeastern Mutual sales representative.

Product 1: Perpetuity with annual payments of $78,000 for $1,000,000

Product 2: The same stream of payments but only lasting 25 years.

For you to be indifferent between the two securities, what price would you be willing to pay for the second product?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Value of perpetuity = perpetual payment / discount rate

Implied discount rate in Product 1 = $78,000 / $1,000,000 = 7.8%

Price you would be willing to pay for 2nd product is calculated as below :

PV of annuity = P * [1 - (1 + r)-n] / r,

where P = periodic payment. We need to calculate this.

r = interest rate per period. This is 7.8%

n = number of periods. This is 25

PV of annuity = $78,000 * [1 - (1 + 7.8%)-25] / 7.8%

PV of annuity = $847,056.52

Price you would be willing to pay for 2nd product is  $847,056.52

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You have been offered an investment that promises to pay out $20,000 at the end of...
You have been offered an investment that promises to pay out $20,000 at the end of the year, followed by payments of $30,000, $40,000, and $50,000 at the end of the subsequent years. Yields in the market are expected to steadily increase over the next year so that the appropriate discount rate is 6% for the first year, 7% for the second year, 8% for the third year, and $9% for the fourth year. How much would you be willing...
2. You are facing two investment opportunities. The first one will return you with an uneven...
2. You are facing two investment opportunities. The first one will return you with an uneven stream of cash flows. The second one is annuity payments. Assume a 4.9% discount rate (your opportunity cost for money) and payments are in the end-of-period. (2a) How much you are willing to pay for this uneven stream of cash flows? Round to the nearest whole dollar. Year Cash Flow 1 $3,300 2 $3,300 3 $4,500 4 $5,300 (2b) If the investment will provide...
You have been offered a unique investment opportunity. If you invest  $8,100 today, you will receive  $405 one...
You have been offered a unique investment opportunity. If you invest  $8,100 today, you will receive  $405 one year from now,  $1,215 two years from now, and $8,100 ten years from now. What is the NPV of the opportunity if the cost of capital is 1.2% per year?
You have been offered a very long-term investment opportunity to increase your money one hundredfold. You...
You have been offered a very long-term investment opportunity to increase your money one hundredfold. You can invest $800 today and expect to receive $80,000 in 40 years. Your cost of capital for this (very risky) opportunity is 23%. What does the IRR rule say about whether the investment should be undertaken? What about the NPV rule? Do they agree? What is the IRR?
Ch 7 You have been offered a very​ long-term investment opportunity to increase your money one...
Ch 7 You have been offered a very​ long-term investment opportunity to increase your money one hundredfold. You can invest $ 1,000 today and expect to receive $ 100,000 in 40 years. Your cost of capital for this​ (very risky) opportunity is 25 %. What does the IRR rule say about whether the investment should be​ undertaken? What about the NPV​ rule? Do they​ agree? What is the IRR​? The IRR of this investment opportunity is _______%
You have been offered a very long-term investment opportunity to increase your money one hundredfold. You...
You have been offered a very long-term investment opportunity to increase your money one hundredfold. You can invest $1,700 today and expect to $170,000 receive in 40 years. Your cost of capital for this (very risky) opportunity is 25% . What does the IRR rule say about whether the investment should be undertaken? What about the NPV rule? Do they agree? The IRR of this investment is ;  (round to one decimal place. i.e. write "12.34%" as "12.3%".) According to IRR...
You have been offered a unique investment opportunity. If you invest $ 8 comma 100$8,100 ​today,...
You have been offered a unique investment opportunity. If you invest $ 8 comma 100$8,100 ​today, you will receive $ 405$405 one year from​ now, $ 1 comma 215$1,215 two years from​ now, and $ 8 comma 100$8,100 in ten years.a. What is the NPV of the opportunity if the cost of capital is 6.7 %6.7% per​ year? Should you take the​ opportunity?b. What is the NPV of the opportunity if the cost of capital is 2.7 %2.7% per​ year?...
You have been appointed to look into the elasticity of toothpaste and toothpicks, two products the...
You have been appointed to look into the elasticity of toothpaste and toothpicks, two products the government is considering taxing. Which product would be a better candidate to tax if the government wishes to raise revenue? Why? Price of toothaste before the tax: $1.50 where Quantity Demanded is 1,000,000 tubes per week Price of toothpaste after the tax: $3.50 where Quantity Demanded is 950,000 tubes per week _____ Price of toothpicks before the tax: $1.00 where Quantity Demanded is 50,000...
Cane Company manufactures two products called Alpha and Beta that sell for $130 and $90, respectively....
Cane Company manufactures two products called Alpha and Beta that sell for $130 and $90, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 102,000 units of each product. Its average cost per unit for each product at this level of activity are given below:                                                                                                Alpha      Beta Direct materials $ 25 $ 10 Direct labor 22 21 Variable manufacturing overhead 17 7 Traceable fixed manufacturing...
Cane Company manufactures two products called Alpha and Beta that sell for $210 and $172, respectively....
Cane Company manufactures two products called Alpha and Beta that sell for $210 and $172, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 128,000 units of each product. Its unit costs for each product at this level of activity are given below: Alpha Beta   Direct materials $ 40 $ 24   Direct labor 38 34   Variable manufacturing overhead 25 23   Traceable fixed manufacturing overhead 33 36...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT