PS_Chapter04

# 3whichofthefollowingstatementsregardinggrowingperpetui

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Unformatted text preview: Joe accept the new entrepreneurʹs offer or stick with the original offer of \$100,000 and the series of payments over three years? Why? Use the table for the question(s) below. Year 0 1 2 3 A -\$150 40 80 100 B -\$225 175 125 -50 5) If the interest rate is 10%, then which investment(s), if any, would you take and why? Answer: NPVA = -150 + 40 / (1.10)1 + 80 / (1.10)2 + 100 / (1.10)3 = \$27.61 NPVB = -225 + 175 / (1.10)1 + 125 / (1.10)2 + -50 / (1.10)3 = -\$0.17 Therefore, you should take A since NPVA > 0 and reject B since NPVB < 0. 4.6 Perpetuities, Annuities, and Other Special Cases 1) Which of the following statements regarding perpetuities is false? A) To find the value of a perpetuity one cash flow at a time would take forever. B) A perpetuity is a stream of equal cash flows that occurs at regular intervals and lasts forever. C) r PV of a perpetuity = C D) One example of a perpetuity is the British government bond called a consol. 3) Which of the following statements regarding growing perpetuities is false? A) We assume that r < g for a growing perpetuity. B) C PV of a growing perpetuity = r−g C) To find the value of a growing perpetuity one cash flow at a time would take forev...
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