Question

"16. An investment promises to pay $6,000 at the end of each year for the next five years and $4,000 at the end of each year for years 6 through 10. a. If you require a 12 percent rate of return on an investment of this sort, what is the maximum amount you would pay for this investment?"

Answer 1

$33,387.70

Step-by-step explanation:

A summary of the cash flows for this investment is :

Year 1 $6,000

Year 2 $6,000

Year 3 $6,000

Year 4 $6,000

Year 5 $6,000

Year 6 $4,000

Year 7 $4,000

Year 8 $4,000

Year 9 $4,000

Year 10 $4,000

So, clear these are uneven cash flows thus use your CFj function on your financial calculator to find the Net Present Value at the rate of 12% as below:

CFj $6,000

CFj $6,000

CFj $6,000

CFj $6,000

CFj $6,000

CFj $4,000

CFj $4,000

CFj $4,000

CFj $4,000

CFj $4,000

I/YR = 12 %

SHIFT NPV = $33,387.70

Thus, the maximum amount you would pay for this investment is $33,387.70.