Question
You are considering two alternate investments one a perpetuity and the other a stream of uneven cash flows. The perpetuity pays $25,000 in perpetuity from
You are considering two alternate investments one a perpetuity and the other a stream of uneven cash flows. The perpetuity pays $25,000 in perpetuity from year 6 onwards, while the uneven cash flow investment pays the following cash flows in years 2 to 7: Yr 2: $80,000, Yr 3: $70,000, Yr 4: $60,000, Yr 5: $50,000, Yr 6: $40,000 and Yr 7: $30,000. Required: If you can only buy one of the above investments at a rate of return of 6% per annum, which would you prefer? Which would you prefer if you could achieve a rate of return of 8% per annum? Provide detailed workings.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started