[HW 1.2b] Towards More Precise Price and Yield Calculations

Yesterday, we evaluated the present value and internal rate of return of a set of cashflows, based on nice regular cash flows.

Unfortunately, the world doesn’t often give us projects with nice regular cashflows, so it’s important to be able to handle irregular cash flows.

Here’s the scenario:

You pay a quarterly bill to your building owner for garbage collection.   In 2015, we know that the garbage bill will be $1,000 due at the last day of Q1, $900 due at the last day of Q2, $1,200 due on the last day of Q3, and $1,100 due on the last day of the year.  By contract, these amounts increase by 2% per year.

The building owner is trying to raise some cash, so she offers you a discount of 20% for prepaying the next six years of garbage collection.   What yield does this imply?  How much would you pay to achieve a yield of 1%, 5%, 10% 15%, 20%, 25%, 35%, and 50%?

Turn in a table like this:

Yield Price
1%
5.0%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%

Please also make a graph of these results.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: