Homework 1 Question 4 4) After negotiations, you purchased a 20-year investment

Question

Homework 1 Question 4

4) After negotiations, you purchased a 20-year investment that pays you $100 at the end of year one, $500 at the end of year 2, and $750 at the end of year 3. Additionally, the investment pays you some fixed cash flow, let’s call it “X”, at the end of each of the remaining seventeen years. You pay $5,544.87 for this investment. Required return on similar investments is 9%. Calculate the annual cash flow that you are going to receive at the end of the final seventeen years; in other words, find “X”.

Explanation / Answer

Present value to be recovered with last bulk receipt = $5,544.87-$1,091.72 = $4,453.15

Year Cash flow PVF@9% Present value 1 $         100 0.917 $              91.74 2 $         500 0.842 $            420.84 3 $         750 0.772 $            579.14 Present value $        1,091.72

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