Lisa is considering making a 6-year loan of $15,000 to Carmax Inc. To repay Lisa, Carmax will pay $500 at the end of Year 1, $2,000 at the end of Year 2, and $2,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, Y, at the end of Years 4 through 6. Lisa regards 10% compounding annually as a rate of return for Carmax. What cash flow must the investment provide at the end of each of the final 3 years, that is, what is Y? (4 points) Hints: Draw a time line. Then, recall the simple formula: 15,000 is the loan that Carmax receives today. It equals to the present values of all the future cash flows. But hard to solve for Y in this way, so we use PVA as an alternative. Starting the end of the fourth period, the beginning of the fifth year, you pay equal amount of Y for four times, so it is an annuity due problem, so you can assume PVA at point 4 can be calculated from the four payments with amount of X.
Lisa is considering making a 6-year loan of $15,000 to Carmax Inc. To repay Lisa, Carmax will pay $500 at the end of Year 1, $2,000 at the end of Year 2, and $2,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, Y, at the end of Years 4 through 6. Lisa regards 10% compounding annually as a rate of return for Carmax. What cash flow must the investment provide at the end of each of the final 3 years, that is, what is Y? (4 points) Hints: Draw a time line. Then, recall the simple formula: 15,000 is the loan that Carmax receives today. It equals to the present values of all the future cash flows. But hard to solve for Y in this way, so we use PVA as an alternative. Starting the end of the fourth period, the beginning of the fifth year, you pay equal amount of Y for four times, so it is an annuity due problem, so you can assume PVA at point 4 can be calculated from the four payments with amount of X.
