Question

An investment is expected to pay nothing for 5 years, then will pay $14 thousand per year for 4 years. If your required rate of return is 6%, what is the maximum you should be willing to pay for this investment?

Answer 1

Answer:

Cash flows will be as follows:

Year Cash flows 2 3 SO $o $14,000 $14,000 $14,000 $14,000 8

Present value of these cash flows =14000 / (1 + 6%)^6 +14000 / (1 + 6%)^7 +14000 / (1 + 6%)^8 +14000 / (1 + 6%)^9

= $36,250.60

Maximum you should be willing to pay for this investment = $36,250.60