A small manufacturing company needs to invest in new equipment. It determines that it can afford to pay back 5,000 in one year.
After that it can pay back 5, 100 and so on. Each year the size of the repayment grows by 2%. The repayments will last for 20 years.
a. If the interest rate is 5% what is the present value of the payment stream?
b. What happens to the present value if the manufacturing company extended its repayment to 25 years?
c. The manufacturing company realizes that, instead of starting repayment of 5,000 in one year it can only start three years later (so in four years from today).
It will still make 20 payments total and they will grow at the same rate. What is the present value of this payment stream today?