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Present Value Problems

1. An investor is considering a business opportunity with the following predicted cash flows.

Time 0 1 2 3 4
Predicted Cash Flow 2200 6500 8500 X 6400

The investor could earn 10% compounded quarterly on an investment of similar risk.
If the investor is willing to pay $26,000 for this business opportunity, what is her expected cash flow at time 3 (to the nearest dollar). Please show your work, including a timeline. (3 points)

2. As corporate treasurer, you are negotiating an amortized loan to fund the purchase of a new office complex in Grand Island, Nebraska. The complex will cost $2.135 million. Your loan is for 70% of the purchase price and will have a term of 15 years with 180 payments. If your monthly payment is $19,015, what is the Effective Annual Rate on this loan (to 4 decimal places)? (3 points)

Solution Preview

1. I recommend that you either use excel or a financial calculator to solve such problems.

Present Value = 26,000

PV of cash flow from time 0 = 2200
PV of cash flow from time 1 = PV of 6500 (n=1, i = 10) = 5,909.091
PV of cash flow from time 2 = PV of 8500 (n=2, ...

Solution Summary

The solution provides answers for two complex present value problems, with detailed explanation.

$2.19