Question

You are considering the purchase of an investment that would pay you $5,000 per year for Years 1‑5, $3,000 per year for Years 6‑8, and $2,000 per year for Years 9 and 10. If you require a 16 percent rate of return, and the cash flows occur at the end of each year, then what is the MOST you would be willing to pay for this investment? Answer to 0 decimal places.

Answer 1

CALCULATION OF THE AMOUNT THAT WE ARE MOST WILLING TO PAY :

For this purpose we need to calculate Present Value of the following Cash stream.

Year	Cash Inflow	Present Value Factor @16%	Present value of cash inflow
1	5000	0.862068966	4310.344828
2	5000	0.743162901	3715.814507
3	5000	0.640657674	3203.288368
4	5000	0.552291098	2761.455489
5	5000	0.476113015	2380.565077
6	3000	0.410442255	1231.326764
7	3000	0.35382953	1061.48859
8	3000	0.305025457	915.0763704
9	2000	0.26295298	525.90596
10	2000	0.226683603	453.3672069
		Total Present value of cash inflow	20558.63316 or 20559

So we are willing to pay maximum 20559 .