Pontification Ltd has a number of investment options however your client has limited these investments to only the following two options: The first investment costs $100,000 and pays the following cash flows in years 3 to 8:

Yr 3: $25,000, Yr 4: $30,000, Yr 5: $20,000, Yr 6: $10,000, Yr 7: $50,000 and Yr 8: $80,000.

The second investment option costs $250,000 and is a perpetuity which pays $25,000 a year with the 1st cash flow occurring at the end of year 3.Your client indicates that he requires a rate of return of 10% p.a. which can be applied to both of these investments. Identify for him whether these investments are good (or not).

Answer rating: 100% (QA)

First Investment Given CF0 100000 CF1 0 CF2 0 CF3 2... View the full answer