Question

Chun-Li is evaluating an investment that will provide the following returns at the end of each of the following years: year 1, $12,500; year 2, $10,000; year 3, $7,500; year 4, $5,000; year 5, $2,500; year 6, $0; and year 7, $12,500. Chun-Li believes that she should earn an annual rate of 7.5 percent on this investment. How much should Chun-Li pay for this investment

Answer 1

39,338.27

Step-by-step explanation:

The amount he would be willing to pay can be determined by calculating the present value of the cash flows

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Cash flow in year 1 = 12,500

Cash flow in year 2 = 10,000

Cash flow in year 3 = 7500

Cash flow in year 4 = 5000

Cash flow in year 5 = 2500

Cash flow in year 6 = 0

Cash flow in year 7 = 12500

I = 7.5

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute