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Dr. Bob Jackson owns a parcel of land that a local farmer has offered to rent for the next 10 years. The farmer has offered to pay $20,000 today or an annuity of $3,200 at the end of each of the next 10 years. Which payment method should Dr. Jackson accept if his required rate of return is 10 percent?
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Solution: Dr. Jackson should choose the payment method that maximizes his net present value. If he chooses the lump sum payment, the net presen,….
You are able to buy an investment today for $1000 that gives you the right to receive $438 in each of the next three years. What is the internal rate of return on this investment?
Solution: This is simply a yield calculation problem. Like any time-value-of-money problem, we are given four inputs and are asked to so………………
Calculate the present value of the income stream given below assuming a discount rate of 8 percent. What happens to value if the discount rate increases to 20 percent?
| Year | Income |
| 1 | $3,000 |
| 2 | $4,000 |
| 3 | $6,000 |
| 4 | $1,000 |
Solution: This problem is solved by entering the annual income stream and discount rate into the cash flow registers of any stan…….
Calculate the IRR and NPV for the following two investment opportunities. Assume a 16 percent discount rate for the NPV calculations:
| Year | Project 1 Cash Flow | Project 2 Cash Flow |
| 0 | -$10,000 | -$10,000 |
| 1 | 1,000 | 1,000 |
| 2 | 2,000 | 12,000 |
| 3 | 12,000 | 1,800 |
Solution: To solve this problem, simply enter each set of cash flows into the cash flow registers of your financial calculator and ask it to find the IRR. For Project 1, the internal rate of return is 16.16%, while for Project 2, the in…………………….
