Page 5 - Test

7.

Note: C = $1 million

5
C*(1+30%) 2 C*(1+30%) 4 C*(1+30%) (1+2%)

5
C*(1+30%) C*(1+30%) 3 C*(1+30%) 5 C*(1+30%) (1+2%) 2

year 0 1 2 3 4 5 6 7

C C*(1+30%) 2 = C*(1+30%) 4

C*(1+30%) C*(1+30%) 3 C*(1+30%) 5

5
∗ + % 1 + 30%
= ∗ 1 −

8% − 30% 1 + 8%
year 0 1 2 3 4 5

+
5
C*(1+30%) (1+2%)
0
C*(1+30%) (1+2%) 2
5

year 0 1 2 3 4 5 6 7

∗ + % ∗ + % 1 5
= ∗

8% − 2% 1 + 8%

PV = PV + PV B
A

PV = $52 million