Problem
Someone has offered to buy you a financial instrument that has the following cash flows:
• You will not receive any cash for the first five years. The first time you will receive a cash flow will be at the end of year 6. You will receive $100 at the end of year 6, $200 at the end of year 8, and $300 at the end of year 10.
• You will receive another payment of $100 at the end of year 11, and the payment will grow at a rate of 6% forever.
• You will need to pay a service fee. The service fee is as follows: you will pay $100 each year from year 1 to year 5 (Le. you will make 5 payments in total. The first payment will occur at the end of year 1, and the last payment will occur at the end of year 5)
Suppose that the discount rate is 10%. How much this financial instrument is worth to you?