Zetterberg Builders is given two options for making payments on a brush hog. Find the value of X such that they would be indifferent between the two cash flow profiles if their TVOM is 4.5% per year compounded yearly. End of Year Series 1 Series 2
0 $300 $0
1 $350 $0
2 $400 $35X
3 $450 $25X
4 $0 $15X
5 $0 $5X

14.90

Explanation:

The computation of the value of X is shown below;

End of Year      Series 1      Series 2         series 1          series 2

0                            $300         $0         1        $300              $0

1                             $350         $0        1.045 $366               $0

2                            $400         $35X   1.092025 $437       38.15X

3                            $450          $25X 1.141166  $514           35.25X

4                             $0             $15X   1.192519 $0              28.8X

5                              $0             $5X   1.246182 $0              6.2X

                                                                        $1,616            108.4X

Now

108.4X = $1,616

x = $1,616 ÷ 108.4

= 14.90

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