Consider the following two cash flow series of payments: Series A is a geometric
ID: 2728964 • Letter: C
Question
Consider the following two cash flow series of payments: Series A is a geometric series increasing at a rate of 5% per year. The initial cash payment at the end of year 1 is $1,000. The payments occur annually for 5 years. Series B is a uniform series with payments of value X occurring annually at the end of years 1 through 5. You must make the payments in either Series A or Series B. Determine the value of X for which these two series are equivalent if your TVOM is i = 5.5%. $ If your TVOM is 8%, would you be indifferent between these two series of payments? Enter the PW for each series to support this choice. PW, Series A: $... PW, Series B: $.... If your TVOM is 5%, would you be indifferent between these two series of payments? Enter the PW for each series to support this choice. PW, Series A:$.... PW, Series B: $
Explanation / Answer
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Series-A Year Cash flow Discount Facator @5.5% Present value 1 1000 0.948 948 2 1050 0.898 943 3 1103 0.852 939 4 1158 0.807 934 5 1216 0.765 930 4.270 4695 Equall Annual Payment = 4695/4.27 = 1100 Thus, Value of X is $ 1,100