P5-13

Time value Jim Nance has been offered an investment that will pay him $500 three years from today. 

 

a. If his opportunity cost is 7% compounded annually, what value should he place on this opportunity today?

 

b. What is the most he should pay to purchase this payment today?

 

c. If Jim can purchase this investment for less than the amount calculated in part a, what does that imply about the rate of return that he will earn on the investment?

 

 

 P5-30

 

Value of mixed streams Find the present value of the streams of cash flows shown in the following table. Assume that the firm’s opportunity cost is 12%. Please show your work.

A                                 B                                            C

 

Year Cash flow     Year   Cash flow                 Year       Cash flow

 

1 -$2,000                1       $10,000                      1-5      $10,000/yr

 

2 3,000                   2-5   5,000/yr                      6-10    8,000/yr

 

3 4,000                   6        7,000

 

4 6,000

5 8,000

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