Question

eekly payments (1.e. 26 paymnents per ye Part C (15 Marks) Suppose you are given the following award plan: for the first two years, it pays you $100 at the end of the first and second year; starting from the third year, it pays $300 at the end of every year that is an odd number, and pays $100 for every year that is an even number, and the pattern continues forever. For example, the cash flows for the first 10 years are (100, 100, 300, 100, 300, 100, 300, 100, 300, 100, and so on). The quoted annual interest rate is 6 % per year, compounded annually. Calculate the present value of this award plan. Assume that the cash flows occur at the end of each year. (Hint: Use effective interest rate(s) per compoun ding period.) ation af Stocks)-(20 Marks) aeonstant

Answer 1

find the equivalent rate of the payments received in 3rd and 4th year

PV = 300/1.06 + 100/1.06*1.06 = 372.0185

PV = 372.0185, FV = 0, N = 2, rate = 6%

use PMT function in Excel

equivalent annual amount = 202.9126

so from third year onwards we can consider it to be a perpetuity of 202.9126 with worth at the end of 2nd year = 202.9126/0.06 = 3,381.8770

PV of cash flows = 100/1.06 + 100/1.06*1.06 + 3381.877/1.06*1.06 = 3193.20