Question

3.

XYZ has an investment worth $56,000. The investment will make a special, extra payment of X to XYZ in 2 years from today. The investment also will make regular, fixed annual payments of $12,000 to XYZ with the first of these payments made to XYZ in 1 year from today and the last of these annual payments made to XYZ in 5 years from today. The expected return for the investment is 12.3 percent per year. What is X, the amount of the special payment that will be made to XYZ in 2 years?

a.

An amount less than $10,000 or an amount equal to or greater than $30,000

b.

An amount equal to or greater than $10,000 but less than $17,000

c.

An amount equal to or greater than $17,000 but less than $22,000

d.

An amount equal to or greater than $22,000 but less than $26,000

e.

An amount equal to or greater than $26,000 but less than $30,000

Answer #1

Value of Investment = PV of Cfs from it.

PV CFs other than Special Pyt:

Year |
CF |
PVF
@12.3% |
PV of CFs |

1 | $ 12,000.00 | 0.8905 | $ 10,685.66 |

2 | $ 12,000.00 | 0.7929 | $ 9,515.28 |

3 | $ 12,000.00 | 0.7061 | $ 8,473.09 |

4 | $ 12,000.00 | 0.6288 | $ 7,545.05 |

5 | $ 12,000.00 | 0.5599 | $ 6,718.66 |

PV of CFs |
$
42,937.75 |

PV of Special Pyt = CF * PVF(r%, n)

= X * PVF(12.3%, 2 )

= X * 0.7929

= 0.7929X

Thus 0.7929X + 42937.75 = 56000

0.7929X = 56000 - 42937.75

= 13062.25

X = 13062.25 / 0.7929

= $ 16473.18

OPtion C is correct. ( As Next available amount > 16473 is 17000)

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