Question

PLEASE SHOW STEP BY STEP AND HOW TO SOLVE USING FINANCIAL CALCULATOR FUNCTIONS: You are a marketing executive at a Boston based Marketing corporation. A client has come to you and said they would like to take on a marketing project if it will EFFECTIVELY earn them 10.00% per year. The project you proposed will cost $100,000 today and $20,000 next year (one year from today). The project will bring in equal cash flows starting next quarter, with the last cash flow anticipated to come in 8 years from today. How much do these cash flows need to be each quarter so that the client earns that EFFECTIVE 10% rate per year?

Answer 1

rate compounded quarterly=(1.1^(1/4)-1)*4=9.6455%

Using financial calculator:

Step 1: FInd present value of outflow next year

N=4

FV=-20000

PMT=0

I/Y=9.6455%/4

CPT PV=$18,181.81386

Step 2: Find present value of outflows

=$18,181.81386+10000=$28,181.81386

Step 3: Find the cash flows each quarter

N=4*8

PV=-28,181.81386

FV=0

I/Y=9.6455%/4

CPT PMT=5341.783307

Alternatively, Using formula:

Cash flows=(100000+20000/((1+9.6455%/4)^4))*(9.6455%/4)/(1-1/(1+9.6455%/4)^(4*8))=5341.783307