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Question 12
You are negotiating to make a 7-year loan of $20,000 to Breck Inc. To repay you, Breck will pay $2,500 at the end of Year 1, $5,000 at
the end of Year 2, and $7,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, X, at the end of each year from
Year 4 through Year 7. Breck is essentially riskless, so you are confident the payments will be made. You regard 8% as an
appropriate rate of return on a low risk but illiquid 7-year loan. What cash flow must the investment provide at the end of each of
the final 4 years, that is, what is X?
(A) $2,520.02
B) $2,831.49
$3,369.47
$2,491.71
0.5 Points
E $2,661.60

Sagot :

The required x = $2,831.49. Option B) is correct.

7-year loan of $20,000 to Breck Inc. To repay you, Breck will pay $2,500 at the end of Year 1, $5,000 at the end of Year 2, and $7,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, X, at the end of each year from Year 4 through Year 7.

What is invesment?

When some apply there money on something so that he can get higher value in returns of his money.

for the final 4 years

20000=2500/1.08+5000/(1.08^2)+7500/(1.08^3)+x/(1.08^4)+x/(1.08^5)+x/(1.08^6)+x/(1.08^7)

x = $2,831.49

Thus the required value of x = $2,831.49.


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