Question

# 3. XYZ has an investment worth \$56,000. The investment will make a special, extra payment of...

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

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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