Problems 9....xxx.doc - Problems 9-7 a What is the present(Year 0 value of the cash flow stream if the opportunity cost rate is 10 percent Cash flow

# Problems 9....xxx.doc - Problems 9-7 a What is the...

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Problems 9-7 a. What is the present (Year 0) value of the cash flow stream if the opportunity cost rate is 10% percent? Cash flow PVIF PV 2000 1 2000 2000 0.909091 1818.182 0 0.826446 0 1500 0.751315 1126.972 2500 0.683013 1707.534 4000 0.620921 2483.685 9136 b. What is the future (Year 5) value of the cash flow stream if the cash flow invested in an account that pays 10 percent annually? Cash flow PVIF PV 2000 1.61051 3221.02 2000 1.4641 2928.2 0 1.331 0 1500 1.21 2750 2500 1.1 2750 4000 1 4000 14714
c. What cash flow today (Year 0), in lieu of the \$2000 cash flow, would be needed to accumulate \$20,000 at the end of Year 5? (Assume the cash flow for Year 1 through 5 remains the same.) Cash flow= 20,000(1+0.1) 5 =20,000(1.1) 5 =\$20,000*1.61051 =\$32210.2 d. Factors that ought to be considered in choosing a discount rate to apply to forecasted cash flows? The fundamental factors that ought to be taken into consideration when choosing a viable discounted rate are the risk and return associations coupled with the timing of the underlying cash flows. Time horizon normally yield upward curves thereby resulting relatively longer periods of cash flows for the least premium in underlying interest.

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Unformatted text preview: Problem 9-11 a. What is the return expected on this investment measured in dollar terms if the opportunity cost rate is 20 percent? Cash flow PVIF PV 250 0.8333 208.325 400 0.6944 277.76 500 0.5787 289.35 600 0.4823 289.38 600 0.4019 241.14 1305.955 b. Provide an explanation in economic terms, of your answer. Use a factor in simplifying the present value of a series of values and the suitable PVIFs are displayed on the table form segregated by the individual period coupled with the interest rate combinations. The present value is thus computed via multiplication of PVIFs by the underlying cash flow. c. What is the return on this investment measured in percentage terms? =\$1305.955-\$1000/1000* 100% =305.955/1000*100% =0.305955*100% =30.60% d. Should this investment be made? Explain your answer. The investment should be made since the return on the investment is relatively impressive. Moreover, there is steady increase in the investment returns between the first year and the corresponding last year....
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• Spring '11
• John Ng'ethe

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