Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
4. Assume a cost of money of 5 percent. Compute the
Transcribed Image Text:### Investment Cash Flows Table
The table below outlines the cash flows over a series of periods for three different investments: A, B, and C. Each investment begins with an initial outlay at Period 0, followed by cash inflows or returns in subsequent periods.
#### Table: Cash Flows for Investments A, B, and C
| Investment | Period 0 | Period 1 | Period 2 | Period 3 | Period 4 | Period 5 |
|------------|----------|----------|----------|----------|----------|----------|
| A | $(1,000) | $100 | $100 | $100 | $100 | $1,100 |
| B | $(1,000) | $264 | $264 | $264 | $264 | $264 |
| C | $(1,000) | | | | | $1,611 |
#### Analysis
- **Investment A**:
- Initial investment of $(1,000) at Period 0.
- Steady cash inflow of $100 from Period 1 to Period 4.
- A larger inflow of $1,100 at the end of Period 5.
- **Investment B**:
- Initial investment of $(1,000) at Period 0.
- Consistent cash inflow of $264 each period from Period 1 to Period 5.
- **Investment C**:
- Initial investment of $(1,000) at Period 0.
- No cash inflows until Period 5, with a one-time inflow of $1,611 at the end of Period 5.
This table helps in analyzing the cash flow patterns and potential returns over time for each investment option.
Expert Solution
Given-
Rate of return= 5%
Period= 5 years
NPV = CF0 + CF1 ··· + CFt /(1+r)t
Where CF= Cash Flow of various years
r= rate
t= time period
The present value is how much money would be required now to produce those future payments.
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