Your brother has offered to give you $120, starting next year, and after that growing at 2.8%

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Your brother has offered to give you $120, starting next year, and after that growing at 2.8% for the next 20 years. You would like to calculate the value of this offer by calculating how much money you would need to deposit in the local bank so that the account will generate the same cash flows as he is offering you. Your local bank will guarantee a 6.3% annual interest rate so long as you have money in the account.

a. How much money will you need to deposit into the account today?

b. Assume that you deposit this amount of money in the account and withdraw the requires payments each year. Using an Excel spreadsheet calculate the remaining balance at the end of years 1, 2, 10, and 19.

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Corporate Finance

ISBN: 9781292304151

5th Global Edition

Authors: Jonathan Berk, Peter DeMarzo

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