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Suppose that you are going to receive two payments of $500, the first at the end...

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Finance

Suppose that you are going to receive two payments of$500, the first at the end of year 3, and the other at the end ofyear 6.

  1. First, draw the time line and mark the time (years) andpayments on the timeline.
  2. How much are you willing to pay for those cash flows (CFs)today if the current discount rate is 5%?
  3. What if the discount rate is 6% instead?
  4. How much would you be willing to pay in at the end of year 1 ifthe discount rate is 5%?
  5. How much would you be willing to pay in at the end of year 2using the same 5% discount rate?

show both formula and with financial calculator

Answer & Explanation Solved by verified expert
3.9 Ratings (512 Votes)
Payment 1 at the end of 3rdyearp1 500payment 2 at the end of 6th year p2 500amount willing to pay today present value of the cashflowsinterest rate r 5 005present value p11r3 p21r6 5001053 5001056    See Answer
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Transcribed Image Text

Suppose that you are going to receive two payments of$500, the first at the end of year 3, and the other at the end ofyear 6.First, draw the time line and mark the time (years) andpayments on the timeline.How much are you willing to pay for those cash flows (CFs)today if the current discount rate is 5%?What if the discount rate is 6% instead?How much would you be willing to pay in at the end of year 1 ifthe discount rate is 5%?How much would you be willing to pay in at the end of year 2using the same 5% discount rate?show both formula and with financial calculator

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