Let r be the nominal interest rate, compounded yearly. For what values of r is the cash flow stream 20,10 preferable to the cash flow stream 0, 34? ( Do not use Financial calculator or excel, show step)
ANSWER
Particulars | Case 1 | Case 2 |
Present Value | 20 | 10 |
Future value | 34 | 34 |
Formula to compute interest | Future value =Present value (1+r)^t | Future value =Present value (1+r)^t |
r equals to | (Future value/Present value)^1/t-1 | (Future value/Present value)^1/t-1 |
required rate of return if t = 1 year | 70% | 240% |
required rate of return if t = 2 year | 30.38% | 84% |
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