5. Present value Aa Aa To find the present value of a cash flow expected to be p

Question

5. Present value Aa Aa To find the present value of a cash flow expected to be paid or received in the future, you will future value cash flow by (1 tr)n the What is the value today of a $42,000 cash flow expected to be received four years from now based on an annual interest rate of 6%? O $53,024 O $26,614 O $33,268 O $41,585 Your broker called earlier today and offered you the opportunity to invest in a security. As a friend, he suggested that you compare the current, or present value, cost of the security and the discounted value of its expected future cash flows before deciding whether or not to invest. The decision rule that should be used to decide whether or not to invest should be Everything else being equal, you should invest if the current cost of the security is greater than the present value of the security's expected future cash flows. Everything else being equal, you should invest if the discounted value of the security's expected future cash flows is greater than or equal to the current cost of the security. O Everything else being equal, you should invest if the present value of the security's expected future cash flows is less than the current cost of the security. Now that you've thought about the decision rule that should be applied to your decision, apply it to the following security offered by your broker: Jing Associates, LLC, a large law firm in Denver, is building a new office complex. To pay for the construction, Jing Associates is selling a security that will pay the investor the lump sum of $10,250 in four years. The current market price of the security is $8,674.

Explanation / Answer

Question 1: divide

Question 2: PV = $42,000 / (1 + 6%)4

= $33,268, which is 3rd option

Question 3: 2nd option

Question 4: Security's worth today = $10,250 / (1 + 5.25%)4

= $8,353, which is 3rd option

Question 5: No, since present price is higher than present value of future cashflow

Question 6: 2nd option

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