Peter's cash flows look like this:
Time: 0 1 2 3 4 5
Outflow 400 400 400 400 5400
Inflow 5000
Kevin's cash flows look like this:
Time: 0 1 2 3 4 5
Outflow 5000
Inflow 400 400 400+X
Martha's cash flows look like this:
Time: 0 1 2 3 4 5
Outflow X
Inflow 400 5400
Step 2: Solve for Martha's purchase price, X, which should yield 5% ( X =
5279)
Step 3: Solve for Kevin's yield using the stream of outflows and inflows (
Annual yield = 9.65% approximately)
Note that solving step 3 requires either TI BA-35 or trial & error.
I hope this helps. . .
Phil