You have an opportunity to make an investment that will pay ​$100 at the end of the first​ year, ​$400 at the end of the second​ year, ​$200 at the end of the third​ year, ​$100 at the end of the fourth​ year, and $100 at the end of the fifth year.   a.  Find the present value if the interest rate is 12 percent. ​ (Hint: You can simply bring each cash flow back to the present and then add them up. Another way to work this problem is to either use the =NPV function in Excel or to use your CF key on a financial calculator—but ​you'll want to check your​ calculator's manual before you use this key. Keep in mind that with the =NPV function in​ Excel, there is no initial outlay. That​ is, all this function does is bring all the future cash flows back to the present. With a financial​ calculator, you should keep in mind that CF0 is the initial outlay or cash flow at time​ 0, and, because there is no cash flow at time​ 0, CF0=​0.) b.  What would happen to the present value of this stream of cash flows if the interest rate were zero​ percent?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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You have an opportunity to make an investment that will pay
​$100
at the end of the first​ year,
​$400
at the end of the second​ year,
​$200
at the end of the third​ year,
​$100
at the end of the fourth​ year, and
$100
at the end of the fifth year.
 
a.  Find the present value if the interest rate is
12
percent. ​ (Hint: You can simply bring each cash flow back to the present and then add them up. Another way to work this problem is to either use the
=NPV
function in Excel or to use your CF key on a financial
calculator—but
​you'll want to check your​ calculator's manual before you use this key. Keep in mind that with the
=NPV
function in​ Excel, there is no initial outlay. That​ is, all this function does is bring all the future cash flows back to the present. With a financial​ calculator, you should keep in mind that
CF0
is the initial outlay or cash flow at time​ 0, and, because there is no cash flow at time​ 0,
CF0=​0.)
b.  What would happen to the present value of this stream of cash flows if the interest rate were zero​ percent?
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