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You have been offered an investment that promises to pay out $20,000 at the end of...

  1. 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 to pay for this investment stream?
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Answer #1

Cash flow payment in year 1(CF1) = $20,000

Cash flow payment in year 2(CF2) = $30,000

Cash flow payment in year 3(CF3) = $40,000

Cash flow payment in year 4(CF4) = $50,000

Yield in Market rate in year 1 = 6%

Yield in Market rate in year 2 = 7%

Yield in Market rate in year 3 = 8%

Yield in Market rate in year 4 = 9%

Calculating the Present Value today of cashflow streams:-

Present Value = $18867.92 + 26203.16 + 31753.29 + 35421.26

= $112,245.64

So, the amount you will be willing to pay for this investment stream is $112,245.64

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