A geometric gradient has a positive cash flow of $1,000 at EOY zero (now), and it increases 5% per year for the following 5 years. Another geometric gradient has a positive value of $2,000 at the EOY 1, and it decreases 6% per year for years two through five. If the annual interest rate is 10%, which geometric gradient would you prefer?

A geometric gradient has a positive cash flow of $1,000 at EOY zero (now), and it increases 5% per year for the following 5 years. Another geometric gradient has a positive value of $2,000 at the EOY 1, and it decreases 6% per year for years two through five. If the annual interest rate is 10%, which geometric gradient would you prefer?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter17: The Management Of Cash And Marketable Securities

Section: Chapter Questions

Problem 1P

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At EOY zero (now), a geometric gradient has a positive cash flow of $1,000 and for the following 5 years, it rises by 5 percent each year. At EOY 1, another geometric gradient has a positive value of $2,000, and for years two through five, it decreases 6 percent every year. What geometric gradient would you prefer, if the annual interest rate is 10 percent?
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