Question: Fred and Barney Need some investment advice and you have been asked to evaluate their offers.
Fred is looking at a investment that would pay him nothing until five years from today and then he would receive $40,000 every six months for ten years (20 payments) with the first payment of $40,000 coming five years from today. He then would receive $100,000 every year for ten years with first of these coming six months after his last payment of $40,000. Finally he would receive two payments of $500,000 with the first of these coming six months after the last payment of $100,000 and the second coming five years after the first payment of $500,000. The investment would cost him $725,000 today.
Barney's investment will pay him $25,000 every year for thirty years with the first of these payments coming six months from today. He also would receive @120,000 every five years for the next fifty years with the first of these coming five years from today and the last coming fifty years from today. Finally he would receive $2,500,000 forty years from today and another $2,500,000 fifty years from today. His investment would cost him $690,000 today.
Using present value method and assuming that they have an opportunity cost of 8%(semi-annual), should they invest?