Your firm has been asked to make an offer on a $2 million structured settlement that is scheduled to be paid out as follows: $500,000 in exactly 1 year, another $500,000 in exactly 2 years, and the remaining $1,000,000 in exactly 3 years. Your firm uses a 10% discount rate for these types of transactions.
a.) What is the intrinsic value of the stream of payments?
b.) What is your expected return if you buy the settlement for $1,450,000?
c.) is this expected return higher or lower than your firm's required return of 10%?
d.) Explain why your expected return was different than 10% at a price of $1,450,000.