Receiving $100 per month, starting today, and continuing monthly for 12 months (i.e., the last payment comes exactly 12 months from today). Then receiving $200 per month, commencing 13 months from today, and ending 24 months from today.

a.If your opportunity cost of funds is 4% per year, compounded monthly, what is the maximum amount that you would pay for this set of promised payments?

b.If, after receiving each monthly payment, you deposited the payment into a bank account earning your opportunity cost of funds, what would be the balance in the bank account in 24 months, immediately after the last payment?

c.If the cost (price) of this investment opportunity is stated as $3600 (i.e. what you'd pay to get these set of payments), would you accept? What is the NPV of the deal?

d.   At a price (cost) $3600, what is the opportunity cost of funds that would leave you just indifferent to accepting this deal (i.e. what is the IRR of the cash flow stream)?

Answer rating: 100% (QA)

a To find the maximum amount that you would pay for this set of promised payments you need to calculate the present value of the cash flows using the ... View the full answer