Given the following set of cash flows:
Period Cash Flow
1…………… $ 45,000
2…………… 40,000
3…………… 35,000
4…………… 30,000
5…………… 25,000
a. If your required rate of return is 7% per year, what is the present value of the above cash flows? Future value?
b. Now, suppose that you are offered another investment that is identical, except that the cash flows are reversed (i.e., cash flow 1 is 25,000, cash flow 2 is 30,000, etc.). Is this worth more, or less, than the original investment? Why?
c. If you paid $ 130,000 for the original investment, what average annual rate of return would you earn? What return would you earn on the reversed cash flows?
d. Still assuming that your required return is 7%, would you be willing to purchase either of these investments? Explain why, or why not.