1) What is the maximum that should be invested in a project at time zero if the inflows are estimated at $4,000 annually for 4 years, and the cost of capital is 10 percent? Write your answer with two decimal point

1) We can calculate the present value by using the following formula in excel:-

=-pv(rate,nper,pmt,fv)

Here,

PV = Present value

Rate = 10%

Nper = 4 periods

Pmt = $4,000

FV = $0

Substituting the values in formula:

= -pv(10%,4,4000,0)

= $12,679.46

2) Computation of the present value:-

Present value = (Coupon payment*((1-1/(1+rate)^n)/rate)) + (FV/(1+rate)^n)

Here,

Coupon payment = $2,000*5% = $100

PV = ($100*((1-1/(1+10%)^4)/10%)) + ($2,000/(1+10%)^4)

= ($100*3.16987) + ($2,000/1.46410)

= $316.99 + $1,366.03

= $1,683.01

3) Computation of the present value of perpetuity:-

PV of perpetuity = Perpetuity / Interest rate

= $100 / 10%

= $1,000