An heiress has a rich grandfather who set up a trust that will pay her $5 million per year for 20 years beginning on her 25th birthday. Assume her 25th birthday is 4 years from now. Further assume that you are a wealthy investor and this heiress is anxious to get her hands on some serious cash. You are offered the opportunity to purchase the rights to receive the promised cash flows from the trust.

a.  If you were to pay $80 million today for the right to receive these cash flows promised to the heiress, what is the net present value (NPV) of this investment, assuming a 10% discount rate is appropriate?

b.  What is the internal rate of return (IRR) of this $80 million investment?

Answer rating: 100% (QA)

a To find the Net Present Value NPV of the investment we need to discount each cash flow back to the ... View the full answer