Use the information for the question(s)below.
Assume that you are 30 years old today and that you are planning on retirement at age 65.Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work.To save for your retirement,you plan on making annual contributions to a retirement account.Your first contribution will be made on your 31st birthday and will be 8% of this year's salary.Likewise,you expect to deposit 8% of your salary each year until you reach age 65.Assume that the rate of interest is 7%.
-You are offered an investment opportunity that costs you $28,000,has an NPV of $2278,lasts for three years,has interest rate of 10%,and produces the following cash flows: The missing cash flow from year 2 is closest to:
A)$12,500.
B)$12,000.
C)$13,000.
D)$10,000.

Question

Use the information for the question(s)below.
Assume that you are 30 years old today and that you are planning on retirement at age 65.Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work.To save for your retirement,you plan on making annual contributions to a retirement account.Your first contribution will be made on your 31st birthday and will be 8% of this year's salary.Likewise,you expect to deposit 8% of your salary each year until you reach age 65.Assume that the rate of interest is 7%.
-You are offered an investment opportunity that costs you $28,000,has an NPV of $2278,lasts for three years,has interest rate of 10%,and produces the following cash flows:  The missing cash flow from year 2 is closest to:
A)$12,500. 
B)$12,000. 
C)$13,000. 
D)$10,000.

Quizplus · Accepted Answer

To find the missing cash flow from year 2, we need to calculate the present value of all the cash inflows and outflows at the interest rate of 10%. Using a financial calculator, we get the present value of the investment opportunity as $28,000, and the present value of the cash flows as follows:
Year 1: $10,000 / (1 + 10%)^1 = $9,090.91
Year 2: Missing cash flow / (1 + 10%)^2 = Present value of missing cash flow
Year 3: $15,000 / (1 + 10%)^3 = $11,396.69
Total present value = $28,000 + $9,090.91 + Present value of missing cash flow + $11,396.69
NPV = $2,278
Solving for the missing cash flow, we get:
$2,278 = $28,000 + $9,090.91 + Present value of missing cash flow + $11,396.69
Present value of missing cash flow = $2,278 - $28,000 - $9,090.91 - $11,396.69
Present value of missing cash flow = -$13,209.60
Since the present value of the missing cash flow is negative, it means that there is a cash outflow in year 2. Taking the absolute value of the present value, we get $13,209.60. This represents the amount that we need to invest now at 10% interest rate to have a cash outflow of $12,000 in year 2. Therefore, the closest answer choice is B) $12,000.

Use the Information for the Question(s)below