An investment makes annual payments. The first payment of $245 is due in one year at i = 1. The payments grow at a rate of 14.0% annually until 1 =14. Payments are then stable until f =32. Afterwards, payments grow at a rate of 2.0% annually (the payment at i =33 is 2.0% bigger that the payment at 1 =32) and are paid into perpetuity. a) What is the size of the cash flow at i =15? |(Give answer to 2 decimal places.) b) What is the size of the cash flow at t =33? |(Give answer to 2 decimal places.) c) What is the present value of the investment if the discount rate is 16.0%? | (Give answer to 2 decimal places.)

An investment makes annual payments. The first payment of $245 is due in one year at i = 1. The payments grow at a rate of 14.0% annually until 1 =14. Payments are then stable until f =32. Afterwards, payments grow at a rate of 2.0% annually (the payment at i =33 is 2.0% bigger that the payment at 1 =32) and are paid into perpetuity. a) What is the size of the cash flow at i =15? |(Give answer to 2 decimal places.) b) What is the size of the cash flow at t =33? |(Give answer to 2 decimal places.) c) What is the present value of the investment if the discount rate is 16.0%? | (Give answer to 2 decimal places.)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 16P

See similar textbooks

Related questions

Q: What is the present value of a perpetuity stream of cash flows that pays P1,000 at the end of year…

A: present value of a perpetuity stream of cash flows = cash flows at end of year 1/(Discount rate -…

Q: A loan is being handed out in multiple increasing semi-annual releases. The first release is P50,000…

A: The loan is a borrowed fund that is repaid after a fixed period of time with a certain rate of…

Q: An annuity with a cash value of $12,000 pays $2,050 at the beginning of every six months. The…

A: Annuity: An annuity is the series of payments which is received or paid for a certain period of…

Q: What is the present value of a growing annuity where the first annual payment (of $40,000) is in one…

A: As per our guidelines we are supposed to answer only one question (if there are multiple questions…

Q: A sum of money invested now at 10 percent compounded semi-annually is to provide payments of $1500…

A: Let the money to be invested now = X Semiannual payment (A) = $1500 Number of payments (n) = 16 r =…

Q: You invest $10,000 into a money market account that pays interest on a semi-annual basis (e.g.,…

A: We use NPER function in excel by taking present value as 10000 and future value as 20000 and…

Q: Annuity A pays 1 at the beginning of each year for five years. Annuity B pays 1 at the beginning of…

A: Macaulay Duration is a weighted average of the maturities of all the income streams of a bond or a…

Q: If money is invested at an interest rate of 5.7 percent per year, find the annual percent yield…

A: Effective yield or the APY takes into consideration the number of times compounding is done in a…

Q: An investment promises two payments of $700, on dates two and four months from today. If the…

A: The present value is the current value of future cash flows. Investors and money lenders use this…

Q: Find the present value PV of the annuity account necessary to fund the withdrawal given. (Assume…

A: Calculation of present value of annuity: Answer: Present value of annuity is $21,735.95

Q: What is the present value of a growing perpetuity that has an initial payment of $20,000 one year…

A: Present value of growing perpetuity = Value one year from now / (Required return - growth rate)

Q: Consider a loan of 1,000,000 which is to be amortized by 60 monthly payments. The interest rate is…

A: Here,

Q: An annuity pays $1000 per year for 12 years. Inflation is 6 percent per year. The annuity costs…

A: Internal rate of return is one of the modern techniques of capital budgeting which considers the…

Q: A sum of money is invested at a rate of 7 percent per year compounded annually. How long it will…

A: Rule 72 refers to the rule which makes it a simple calculation for the person to determine that in…

Q: Suppose we invest £100,000 at a semi-annually compounded interest rate of 6% for 1 year. What are…

A: Net ROI (return on investment) is calculated by subtracting the initial amount of investment from…

Q: A four-year investment requires annual deposits of $300 at the beginning of each year. The deposits…

A: Time = t = 4Payment = p = $300Interest Rate = r = 9%Payment Type = at the beginning

Q: An investment pays $4,000 per year at the beginning of each year for the next 4 years and then…

A: The time value of money is a foundational finance concept that accounts the effects of compounding…

Q: An investment will pay $25 per year (indefinitely), starting in one year’s time. The annual payments…

A: Given, Annual payment = $25 per year The growth rate of Annual payments = 3% Price of the investment…

Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

An investment makes annual payments. The first payment of $245 is due in one year at i = 1. The payments grow at a rate of
14.0% annually until t =14. Payments are then stable until t =32. Afterwards, payments grow at a rate of 2.0% annually (the
payment at i =33 is 2.0% bigger that the payment at 1 =32) and are paid into perpetuity.
a) What is the size of the cash flow at / =15?
2$
|(Give answer to 2 decimal places.)
b) What is the size of the cash flow at t =33?
|(Give answer to 2 decimal places.)
c) What is the present value of the investment if the discount rate is 16.0%?
| (Give answer to 2 decimal places.)

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

Step 2

Step 3

Step 4

Step 5

Step 6

Step 7

Step by step

Solved in 7 steps with 6 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

You make an investment into a money market account at time T=0. In year T=5, the value of the money market account will be $5,000. The money market account pays an annual interest of R=6%, and interest is compounded on a quarterly basis. What is the present value of this account?
Investment A will make N annual payments of $300.00 with the first of the N payments due immediately. Investment A has a value of $20000.00. Investment B is an ordinary annuity that will make (N minus 1) annual payments of $300.00 with the first payment due in one year from today. If investment A and investment B have the same expected return, then what is the value of investment B?
You are evaluating a growing perpetuity product from a large financial services firm. The product promises an initial payment of $24,000 at the end of this year and subsequent payments that will thereafter grow at a rate of 0.05 annually. If you use a discount rate of 0.10 for investment products, what is the present value of this growing perpetuity? Round to two decimal places.
Suppose you are going to receive $11,000 per year for 8 years. The appropriate interest rate is 11 percent per year. Requirement 1: What is the present value of the payments if they are in the form of an ordinary (a)annuity (cash flow starts at the end of the first compounding period)? (Click to select) (b) What is the present value if the payments are an annuity due (cash flow starts at the beginning of the first compounding period)? (Click to select) Requirement 2: (a)Suppose you plan to invest the payments for 8 years, what is the future value if the payments are an ordinary annuity? (Click to select) (b)Suppose you plan to invest the payments for 8 years, what is the future value if the payments are an annuity due? (Click to select)
A sum of money is invested at a rate of 7 percent per year compounded annually. How long it will take for the investment to double?
You are trying to value the following investment opportunity: The investment will cost you $5663 today. In exchange for your investment you will receive cash payments in perpetuity. The first payment will occur after one year and will be $431. Afterwards, cash payments will grow by 1.3% annually. The applicable interest rate for this investment opportunity is 7.6% (effective annual rate. Calculate the NPV of this investment opportunity.
Consider the following two cash flow series of payments: Series A is a geometric series increasing at a rate of 8% per year. The initial cash payment at the end of year 1 is $1,000. The payments occur annually for 5 years. Series B is a uniform series with payments of value X occurring annually at the end of years 1 through 5. You must make the payments in either Series A or Series B. Solve, a. Determine the value of X for which these two series are equivalent if your TVOM is i = 6.5%. b. Given the value of X from part a, if your TVOM is 8%, would you be indifferent between these two series of payments? If not, which do you prefer? c. Given the value of X from part a, if your TVOM is 5%, would you be indifferent between these two series of payments? If not, which do you prefer?
at is the external rate of return for the investment project? Should the new computer system be recommended for purchase? 2. You borrow $280,000 at 4.00% per year and will pay off the loan in equal payments starting one year after the loan is made over a period of ten years. What are the annual end-of-year payments? Determine the amount of interest and principal that are paid each year. What is the total interest paid for the loan? 3. A distillation column is designed purchased and installed for a aoat of $a sill:
You will receive cash flows of $23.42 next year from a perpetuity. The perpetuity is indexed to inflation, π=1.1%, such that payments grow at 1.2% faster than inflation. If the interest rate is 9.1% per year, what is the PV of the perpetuity?
An investment promises two payments of $700, on dates two and four months from today. If the required rate of return on the investment is 6.0%: What is the value of the investment today?
An investment becomes P 4,500,000 four years from now and becomes P 5,250,000 thirteen years from now. a. Assuming rate of compounded interest remains constant through time, what was the investment's value on the present time? b. What rate of interest compounded quarterly is equivalent to the interest rate of the given investment? c. What rate of interest compounded monthly is equivalent to the interest rate of the given investment?
An investment earns an annual interest rate of 12 percent compounded Semi annually. What is the effective annual rate? Use excel.