Question

A lifestyle investment company has the following two options: The first investment option, which costs $65,000,...

A lifestyle investment company has the following two options: The first investment option, which costs $65,000, is a perpetuity and pays $10,000 a year (in perpetuity) from year 3 onwards. The second investment costs $60,000 and pays the following cash flows in years 2 to 7: Yr 2: $15,000, Yr 3: $16,000, Yr 4: $17,000, Yr 5: $18,000, Yr 6: $19,000 and Yr 7: $20,000. Identify, for your client, which of these investments are good investments, assuming that the rate of return on investment is 13% p.a. for your client.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Present value of perpetuity = Perpetual cash flow/Required rate of return

Value of first investment option at the end of year 2 = $10,000/0.13 = $76,923.08

Present value of first investment option = $76,923.08/1.132 = $60,242.05

Present value of second investment option = $15,000/1.132 + $16,000/1.133 + $17000/1.134 + $18,000/1.135 + $19,000/1.136 + $20,000/1.137 = $60,659.36

Second investment is a good investment because its fair value is more than the cost of the investment.

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
A lifestyle investment company has the following two options: The first investment option, which costs $65,000,...
A lifestyle investment company has the following two options: The first investment option, which costs $65,000, is a perpetuity and pays $10,000 a year (in perpetuity) from year 3 onwards. The second investment costs $60,000 and pays the following cash flows in years 2 to 7: Yr 2: $15,000, Yr 3: $16,000, Yr 4: $17,000, Yr 5: $18,000, Yr 6: $19,000 and Yr 7: $20,000. Identify, for your client, which of these investments are good investments, assuming that the rate...
Pontification Ltd has a number of investment options however your client has limited these investments to...
Pontification Ltd has a number of investment options however your client has limited these investments to only the following two options: The first investment costs $100,000 and pays the following cash flows in years 3 to 8:Yr 3: $25,000, Yr 4: $30,000, Yr 5: $20,000, Yr 6: $10,000, Yr 7: $50,000 and Yr 8: $80,000.The second investment option costs $250,000 and is a perpetuity which pays $25,000 a year with the 1stcash flow occurring at the end of year 3.Your...
You are considering two alternate investments – one a perpetuity and the other a stream of...
You are considering two alternate investments – one a perpetuity and the other a stream of uneven cash flows. The perpetuity pays $25,000 in perpetuity from year 6 onwards, while the uneven cash flow investment pays the following cash flows in years 2 to 7: Yr 2: $80,000, Yr 3: $70,000, Yr 4: $60,000, Yr 5: $50,000, Yr 6: $40,000 and Yr 7: $30,000. Required: If you can only buy one of the above investments at a rate of return...
41. Evaluating Alternative Investments. Washington Brewery has two independent investment opportunities to purchase brewing equipment so...
41. Evaluating Alternative Investments. Washington Brewery has two independent investment opportunities to purchase brewing equipment so the company can meet growing customer demand. The first option (equipment A) requires an initial investment of $230,000 for equipment with an expected life of 5 years and a salvage value of $20,000. The second option (equipment B) requires an initial investment of $120,000 for equipment with an expected life of 4 years and a salvage value of $15,000. The company’s required rate of...
Determine the payback period in years for a project that costs $65,000 and would yield after-tax...
Determine the payback period in years for a project that costs $65,000 and would yield after-tax cash flows of $13,000 the first year, $15,000 the second year, $18,000 the third year, $20,000 the fourth year, $24,000 the fifth year, and $30,000 the sixth year. Question 7 options: 3.95 3.33 3.73 3.20 4.16 Determine the internal rate of return for a project that costs $298,000 and would yield after-tax cash flows of $28,000 per year for the first 5 years, $36,000...
Evaluate which of the following options would be your best investment based solely on the yield...
Evaluate which of the following options would be your best investment based solely on the yield to maturity criterion.     Option #1: Purchase a $20,000 discount bond selling for $16,200 and maturing in 6 years.            Option #2:  Purchase a $20,000 coupon bond with a 5.5% coupon rate selling for $10,600 and maturing in 6 years.     Option #3: Lend a reliable friend $15,000 with the agreement that she pays you $6,534.80 five years from now,                        $8,540.72 ten years from now, and $11,162.38 fifteen...
3. Two annuities are available for purchase that your client has identified. The first annuity pays...
3. Two annuities are available for purchase that your client has identified. The first annuity pays $2,400 each month over a 4 year period at a nominal rate of 11% p.a. The second annuity pays $15,000 each six-month period, again over 4 years, at a nominal rate of 12% p.a., but has an annual fee of $500, paid at the beginning of each year. Identify which of the two annuities would be a better option for your client Course：Business Finance
The management of Unter Corporation, an architectural design firm, is considering an investment with the following...
The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows: Year Investment Cash Inflow 1 $ 75,000 $ 6,000 2 $ 7,000 $ 12,000 3 $ 18,000 4 $ 17,000 5 $ 20,000 6 $ 18,000 7 $ 16,000 8 $ 14,000 9 $ 10,000 10 $ 13,000 Required: 1. Determine the payback period of the investment. 2. Would the payback period be affected if the cash inflow in the last year...
The management of Unter Corporation, an architectural design firm, is considering an investment with the following...
The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows: Year Investment Cash Inflow 1 $ 75,000 $ 6,000 2 $ 7,000 $ 12,000 3 $ 18,000 4 $ 17,000 5 $ 20,000 6 $ 18,000 7 $ 16,000 8 $ 14,000 9 $ 10,000 10 $ 13,000 Required: 1. Determine the payback period of the investment. 2. Would the payback period be affected if the cash inflow in the last year...
You are comparing two investment options. Option A requires $10,000 on day 0, and pays five...
You are comparing two investment options. Option A requires $10,000 on day 0, and pays five annual payments starting with $5,000 the first year followed by four annual payments of $2,500 each. Option B also requires $10,000 on day 0, and pays five annual payments of $3,000 each. Using the incremental IRR approach, can you conclude which one of the following statements is correct given these two investment options? Given a positive rate of return, Option A has a higher...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT