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Question 5 a) You are offered an investment that will make three $5,000 payments. The first payment will occur four years from today. The second
Question 5 a) You are offered an investment that will make three $5,000 payments. The first payment will occur four years from today. The second will occur in five years, and the third will follow in six years. If you can earn 11 percent, what is the most this investment is worth today? What is the future value of the cash flows? (8 Marks) b) Consider an investment that costs $400 and pays $100 per year forever. We use a 20 percent discount rate on this type of investment. What is the ordinary payback, the discounted payback and the NPV? (8 Marks) c) It is sometimes stated that the net present value approach assumes reinvestment of the intermediate cash flows at the required return. Is this claim correct? (4 Marks)
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