Using the information in the accompanying table, answer the questions that follow.
Year (t) Cash flow
1 ............... $ 800
2 ............... 900
3 ............... 1,000
4 ............... 1,500
5 ............... 2,000
a. Determine the present value of the mixed stream of cash flows using a 5% discount rate.
b. How much would you be willing to pay for an opportunity to buy this stream, assuming that you can at best earn 5% on your investments?
c. What effect, if any, would a 7% rather than a 5% opportunity cost have on your analysis? (Explain verbally.)