A boutique is evaluating an investment that will provide the following returns cash flows at the end of the following years:Year 1: $ 1,200,000 ;Year 2: $ 650,000 ;Year 3: $ 0 ;Year 4: $ 800,000 ;Year 5: $ 450,000
The hotel investors believe they should earn an annual rate of return of 14% on its investments. What maximum price should they pay for this investment?
a) $ 623,242.40
b) $ 2,260,165.59
c) $ 3,100,000
d) $ 2,576,588.78
The correct answer is option B
Maximum price should they pay for the investment =
Cash flow of the year /( 1 +annual rate of return)n
cash flow of each years = $1200000,$650000,$0,$800000,$450000
Rate of return = 14%
Maximum price they should invest=
1200000/(1.14)+650000/(1.14)2
+0+800000/(1.14)4+450000/(1.14)5
= 1052631.57+500153.89500153.89+473664.22+233715.89
=2260165.59
A boutique is evaluating an investment that will provide the following returns cash flows at the...