Question: For problems 5 & 6 use required nominal annual return: 10.00% 5. Consider the following end-of-year cash flows: Year Cash flow 0 0 $0.00 1

For problems 5 & 6 use required nominal annual return: 10.00%
5. Consider the following end-of-year cash flows:
Year Cash flow 0
0 $0.00
1 $40.00
2 $60.00
3 $60.00
Present Value
a. What is the present value of these cash flows (in year 0)? $0.00
b. If the purchase price of this investment is $140 today, would you buy it? Why?
(Compare instrinsic value to actual price)
c. What is the expected rate of return on this investment if the purchase price is $140?
Year Cash flow Internal Rate of Return
0 -$140.00
1 $40.00
2 $60.00
3 $60.00
d. Would you buy this investment based on your answer to part c. and why?
(Compare expected return to required return).

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