Question

Chapter 5: 01. You have made various investments that, together, will pay you the following stream of cash flows: $40 at t-2, $90 at t-3, $160 at t-4, 5, and 6, and $90 at the end of each year forever, starting at t-7. Using a discount rate of 10%, determine what this stream of cash flows is worth in today's dollar terms? Q2. You are evaluating a peculiar real-estate venture that has the following cash flows: an outflow of $210K at the end of the first year, a cash flow of 1$98K in three years, a cash inflow of IS101K two years after the preceding cash flow, a four-year annuity of cash flows with the first 1$70K cash flow occurring at t-9, and a perpetual series of S10K cash flows starting with the first cash flow 15 years from today. (a) Using a discount rate of 0.10, calculate the value of this real-estate opportunity. (b) According to these forecasted cash flows, what could you sell the venture for at t=147(c)Based on the same forecasted cash flows, what could you sell the venture for at t-8? (d)Lastly, what could you sell the venture for at t-6? Q3. Consider the following capital market. You want to be able to withdraw I$150K five years from today in order to pay for your entire graduate school education. (a) If you can earn a 4.21% rate of return per year, how much do you need to invest today? (b) If you can earn 4.21%year, how much do you need to invest one year from today? (c) If you can earn 4.21%year, how much must you deposit at the end of each year for 5 years? (d) How much must you deposit at the beginning of each year for 5 years? Q4. You have invested in a perpetuity, the cash flows of which can be gifted to your children, which can be gifted to their children, which can be gifted to those children's children, and so on. The perpetuity begins with a l$90 cash flow four years from now and continues forever. Using a discount rate of 10%, determine what this payoff is worth to you in today's dollar terms. Q5. You plan to purchase a taco bar from Daddy Yankee. The taco bar's forecasted future cash flows are: 1$100K at t-2, 1$140K at t-4, and 1$125K at t-7. The uncertainty surrounding these future CFs is such that a 5.40% rate of return is appropriate for

Answer 1

Q1.

Worth in today dollar terms

=40/(1+10%)^2+90/(1+10%)^3+160/(1+10%)^4+160/(1+10%)^5+160/(1+10%)^6+(90/10%)/(1+10%)^6

=907.65