Business Finance Questions

• thickskin23

  12 Mar 08, 22:25

  1. What is the present value of a stream of 2 annual cash flows of $100 beginning in one year time where the interest rate is 5% pa for the first year and 8 %pa for the second year.

  
  
  2. Assuming an interest rate of 10%, what is the amount of money a person must be given now so that he is indifferent to receiving a stream of 5 annual payments of $50 each

• Paradise Lost

  13 Mar 08, 17:33

  1. Ans: 100/(1+0.05) + 100/(1+0.08)^2

  Work the arithmetic out yourself for the next step.

  2. 5 annual payments of $50 discounted at the interest rate of 10% per annum:

  Ans: 50/(1+0.1) + ... + 50/(1+0.1)^5

  Rationale: Investor can use this same sum of money and re-invest it at the same rate of 10%, giving him the same amount of money after 5 years, therefore making him indifferent.

  Work the arithmetic out yourself for the next step.

  Edit: Typos