Kate Snead has been offered four investment opportunities, all equally priced at

Question

Kate Snead has been offered four investment opportunities, all equally priced at $45,000. Because the opportunities differ in risk, Kate's required returns (i.e., applicable discount rates) are not the same for each opportunity. The cash flows and required returns for each opportunity are summarized below.

Find the present value of each of the four investment opportunities. Round your answer to two decimal places.
Investment A: $  
Investment B: $  
Investment C: $  
Investment D: $  

Which, if any, opportunities are acceptable?

Which opportunity should Kate take?

Opportunity Cash Flows Required Return A $8,500 at the end of 5 years 13% B End of Year Amount 14% 1 $10,000 2 13,000 3 19,000 4 11,000 5 12,000 6 10,000 C $5,500 at the end of each year for the next 30 years. 9% D $7,000 at the beginning of each year for the next 20 years. 18%

Explanation / Answer

A)

Investment A : $4,615.50

PV of A: $8,500* PV(5, 13%)= $8,500 * 0.543 = $4,615.50

Investment B : $48,900.60

PV of B: $10,000/(1.14) + $13,000/(1.14)2 + $19,000/(1.14)3 + $11,000/(1.14)4 + $12,000/(1.14)5 $10,000/(1.14)6 = 8771.92 + 10003.07 + 12824.45 + 6512.88 + 6232.42 + 4555.86 = $48,900.60

Investment C : $56,504.80

PV of C: $5,500*PVAF(30, 9%) = $5,500 * 10.2736 = $56,504.80

Investment D : $37,468.90

PV of D: $7,000*PVAF(20, 18%)= $7,000 * 5.3527 = $37,468.90

B)

Opportunities B and C are acceptable because the present value of their cash flows are greater than the current cost of $45,000. Opportunities A and D are below thecost of $45,000 , So they are not acceptable.

C) None

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