Using the information in the accompanying table, answer the questions that follow. Year (t) Cash flow 1

Question:

Using the information in the accompanying table, answer the questions that follow.
Year (t) Cash flow
1 ............... $ 800
2 ............... 900
3 ............... 1,000
4 ............... 1,500
5 ............... 2,000
a. Determine the present value of the mixed stream of cash flows using a 5% discount rate.
b. How much would you be willing to pay for an opportunity to buy this stream, assuming that you can at best earn 5% on your investments?
c. What effect, if any, would a 7% rather than a 5% have on your analysis? (Explain verbally.)

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...