Question

you are considering the purchase of an investment that would pay you $5,000 per year for years 1-5, $3,000 per year for years 6-8 and $2,000 per year for years 9 and 10. if you require a 17.7 percent rate of return, and the cash flows occur at the end of each year then what is the most you would be willing to pay for this investment?

Answer 1

Answer -

Step - (1) - Information Given -

Year	Cash Flow ($)
1 - 5	5000
6 - 8	3000
9 - 10	2000

Rate of Return = 17.7%

.

Step - (2) - Calculation of Amount to be Paid for the Investment -

Year	Cash Flow ($)	Calculation Cash Flow / (1+r)n	Present Value ($)
1	5000	5000 / (1+0.177)1	4248.09
2	5000	5000 / (1+0.177)2	3609.25
3	5000	5000 / (1+0.177)3	3066.48
4	5000	5000 / (1+0.177)4	2605.34
5	5000	5000 / (1+0.177)5	2213.54
6	3000	3000 / (1+0.177)6	1128.40
7	3000	3000 / (1+0.177)7	958.71
8	3000	3000 / (1+0.177)8	814.53
9	2000	2000 / (1+0.177)9	461.36
10	2000	2000 / (1+0.177)10	391.98
Total Amount to be Paid for the Investment			19497.68