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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. Present value problems for investors are determined. The business opportunities with the predicted cash flows are determined.

$2.19