1. Your cash flows are $195,000 this year, and you expect cash flow to keep pace
ID: 2742094 • Letter: 1
Question
1. Your cash flows are $195,000 this year, and you expect cash flow to keep pace with any increase in the general level of prices. The interest rate currently is 5.1%, and you anticipate inflation of about 1.1%.
a. What is the present value of your firm’s cash flows for years 1 through 4?
b. How would your answer to the above change if you anticipated no growth in cash flow?
2. you have $17,000 in the bank earning interest of 0.75% per month. You need $27,000 to make a down payment on a house. You can save an additional $100.00 per month. How long will it take you to accumulate the $27,000?
1. Your cash flows are $195,000 this year, and you expect cash flow to keep pace with any increase in the general level of prices. The interest rate currently is 5.1%, and you anticipate inflation of about 1.1%.
a. What is the present value of your firm’s cash flows for years 1 through 4?
b. How would your answer to the above change if you anticipated no growth in cash flow?
2. you have $17,000 in the bank earning interest of 0.75% per month. You need $27,000 to make a down payment on a house. You can save an additional $100.00 per month. How long will it take you to accumulate the $27,000?
Explanation / Answer
1)
a)
present value of cash flows
= 195000/1.051 + 195000*1.011/1.051^2 + 195000*1.011^2/1.051^3 + 195000*1.011^3/1.051^4
= 700846.86
b)
present value of cash flows
= 195000/1.051 + 195000/1.051^2 + 195000/1.051^3 + 195000/1.051^4
= 689857.17
2)
17000 * (1+0.75%)^n + 100 * [1-(1+0.75%)^-n]/0.75% = 27000
=>
17000 * 1.0075^n + 13333.33 [1-1.0075^n] = 27000
=>
3666.67 * 1.0075^n = 13666.67
=>
n= 176.08 months
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