Question

A real estate entrepreneur feels that the cash flow from a property will enable her to pay an investment firm $20,000 per year, at the end of every year, for eight years. How much should the group be willing to invest in her project if they require a 7.5% annual return (annually compounded, assuming the first of the eight equal payments arrives one year from the date the investment proceeds are disbursed)?

A

$87,860

B

$110,696

C

$137,282

D $117,146

Answer 1

	To make this investment a profitable deal the PV of the receipts should be more then or equal to amount of investment
	Annual receipt =		20000
	Time =		8 Years
	Required return =		7.50%	P.a.
	Year(n)	Cash flow	PV Factor @ 7.5%	PV of cash flows
	a	b	c= 1/ (1+r)^n	d = b x c
	1	20000	0.930233	18604.65
	2	20000	0.865333	17306.65
	3	20000	0.804961	16099.21
	4	20000	0.748801	14976.01
	5	20000	0.696559	13931.17
	6	20000	0.647962	12959.23
	7	20000	0.602755	12055.1
	8	20000	0.560702	11214.04
				117146.1
	Answer is D