PLEASE ANSWER ALL QUESTIONS. The calculations have to be using Excel. 1)You are

Question

PLEASE ANSWER ALL QUESTIONS. The calculations have to be using Excel.

1)You are considering an investment that will pay you $12,000 the first year, $13,000 the second year, $17,000 the third year, $19,000 the fourth year, $23,000 the fifth year, and $28,000 the sixth year (all payments are at the end of each year)

What is the maximum you would be willing to pay for this investment if your opportunity cost is 11%?

2)You are considering an investment that will pay you $12,000 the first year, $13,000 the second year, $17,000 the third year, $19,000 the fourth year, $23,000 the fifth year, and $28,000 the sixth year.

If this investment is going to cost you $70,000 today what rate of return would you be earning?

3)How much would you be willing to pay for an investment that will pay you and your heirs $16,000 each year in perpetuity if the first payment is to be received in 9 years? Assuming your opportunity cost is 6%?

Additional questions:

Rework problem (1) assuiming an opportunity cost of 11% with daily compounding

Rework problem (3) If you want the payments to grow by 2% indefinitely. (first payment is $16,000 in year 9)

Explanation / Answer

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1) A B C D E F Year 1 2 3 4 5 6 1 Cash received 12000 13000 17000 19000 23000 28000 2 Opportunity Cost 0.11 Maximum payment in investment $74,927.37 Excel Formula = NPV(A2,A1:F1) 2) A B C D E F G Year 0 1 2 3 4 5 6 1 Cash flow -70000 12000 13000 17000 19000 23000 28000 Rate of return 13.07% Excel formula =IRR(A1:G1) 3) Perpetual cash flow 16000 Opportunity Cost 6% Terminal value after 9 years 266666.67 Excel formula = 16000/6% PV of Terminal Value 157839.59 Excel Formula = 266666.67/1.06^9 Rework problem (1) assuiming an opportunity cost of 11% with daily compounding A B C D E F Year 1 2 3 4 5 6 1 Cash received 12000 13000 17000 19000 23000 28000 2 Opportunity Cost Daily compounding 0.11625957 Excel formula =(1+11%/365)^365-1 Maximum payment in investment $73,387.31 Excel Formula = NPV(A2,A1:F1) Rework problem (3) If you want the payments to grow by 2% indefinitely. (first payment is $16,000 in year 9) Perpetual cash flow 16000 Opportunity Cost 6% Terminal value after 9 years with growth 2% 400000.00 Excel formula = 16000/(6%-2%) PV of Terminal Value 236759.385 Excel Formula = 400000/1.06^9

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