Two-part Question, please show steps for answer. I\'m struggling with these two
ID: 2750916 • Letter: T
Question
Two-part Question, please show steps for answer. I'm struggling with these two questions
Your sister recently graduated. Rather than take the job she was offered at a prestigious investment bank, she has decided to go into business for herself. She believes that her business will require an initial investment of $2 million. After that, it will generate a cash flow of $200,000 at the end of one year, and this amount will grow by 6% per year thereafter (i.e. forever). What is the IRR of this investment opportunity? As a crazy 30 day promotion, Exponential Bank offers an APR of 25% which compounds continuously. How much interest would you earn if you put your life savings of $10,000 in Exponential Bank for the 30 promotional days?Explanation / Answer
(a) IRR is the rate at which Present value of inflow is equal to outflow
Initial Outflow = $20,00,000
PV of Perpetuity = D1 / (r-g) = $200,000/(r-.06)
Equating both outflow and PV of inflow
$20,00,000 = $200,000/(r-.06)
=>. r-0.06 = 0.10
=> r = .10 + .06 = 16%
(b) Amount with continuous compounding = Principal * ert
Principal = $10,000
t = 30/365 = 0.82191781
r = 0.25
Value of Investment after 30 days = $10,000 * e(0.25*0.82191781)
=> Investment after 30-days = 10,207.61
Interest = $10,207.61 - $10,000 = $207.61
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