Question
Problem 9 (Growing Annuity, 15 points total). Mercedes, Inc. is considering leasing the RoadRider bike sales shop in Merced, CA for ten (10) years. Net
Problem 9 (Growing Annuity, 15 points total). Mercedes, Inc. is considering leasing the RoadRider bike sales shop in Merced, CA for ten (10) years. Net annual cash flow from the shop are estimated to start at $105,000 per year (for the year 2021) and to grow at a constant rate of 5 percent per year over the next 10 years (with growth starting in 2022). Mercedes discount rate (the interest rate it uses for project evaluation) is 7.1 percent. How much should Mercedes be willing to pay for the RoadRider lease today (the end of 2020)? (You can assume the first cash flow is $105,000 at the end of 2021, and there is no cash flow after ten years.)
Write down your calculator entries for N, I/Y, PMT, FV, and your answer from CPT PV. You will record some of your answers in three parts to this problem. Note: This is a growing annuity so your entries for I/Y (r*) and PMT (C*) need to reflect this.
Part A (here). What is your entry for I/Y?
Part b) What is your entry for PMT?
What is the present value of the growing annuity?
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