You expect to receive $85,000 in net cash payments at the end of each year for t

ID: 2757838 • Letter: Y

Question

You expect to receive $85,000 in net cash payments at the end of each year for the next 7 years.

A. What is the worth of the expected cash flow stream to you today?

B. If today you had to pay $450,000 to get the stream of payments would you do so? Support your answer.

C. If your opportunity cost was 10% would you pay $450,000 for the stream of cash flows? Why??

D. If you paid $450,000 for the stream of cash flows what rate(%) do you expect to earn?

E. How long to the nearest 2 digit fraction of time does it take to get your money back?

F. What rate of return do you expect to earn per dollar invested?

Part A

Worth of cash flows = annual cash flow x N

= 85000 x 7

= 595,000

Part B

No, I won’t be doing so because the worth of cash flows is 595,000 and I’m getting only 450,000.

Part C

PV of annuity = annual cash flow x PVIFA(n,R)

= 85000 x PVIFA(7,10%)

= 85000 x 4.8684188

= 413,815.60

I won’t be paying 450,000 as the Pv of cash flows is lower than 450,000

Part D

PV of annuity = annual cash flow x PVIFA(n,R)

450,000 = 85000

PVIFA(7,R) = 5.2941176

R= 7.51%

So the rate would be 7.51%.

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