Consider the following case The Purpie Lion Beverage Company expects the folowin

Question

Consider the following case The Purpie Lion Beverage Company expects the folowing cash fows from its manufacturing plant in Palau over the next sx years: Annual Cash Flows Year 1 Year 2 $37,500 $330,000 $450,000 $550,000 $725,000 Year 3 Year 4 Year 5 Year 6 $400,000 The CFO of the company be leves annual interest of this uneven cash flow stream, rounded to the nearest whole dollar? that an appropriate annual interest rate on this investment is 65%, what is the present value O $2,492,500 O $2,125,000 $767,500 $1,929,935 Identily whether the situations described in the following table are examples of uneven cash flows or annuity payments Annuity Payments Description Cash Flows Debbie has been donating 10% of her salary at the end of every year to charity for the last three years. Her salary increased by 15% every year in the last three years You deposit a certain equal amount of money every year into your pension fund. Amit recelves quarterly dividends from his investment in a high-dividend yleld, index exchange-traded fund. Aakash borrowed some money from his friend to start a new business. He promises to pay his friend $2,650 every year for the next five years to pay off his loan along with interest.

Explanation / Answer

Correct answer is option 4 i.e., $1929935

1st: Annuity payment (here it is increasing annuity payment)

2nd : Annuity payment

3rd: Uneven cashflows

4th : Annuity payment

6.50% Year 1 2 3 4 5 6 cashflow $    400,000.00 $ 37,500.00 $ 330,000.00 $ 450,000.00 $ 550,000.00 $ 725,000.00 PV $    375,586.85 $ 33,062.22 $ 273,190.20 $ 349,795.39 $ 401,434.46 $ 496,867.24 NPV $ 1,929,936.36

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