Question

5. A An investment provides you with $1,000 after six years and $2,000 after nine years. What is the present value of these cash flows if you require a 7% rate of return (discount the cash flows at that rate)?

B Calculate the present value of $400 to be received at the beginning of each year for four years if the discount rate is 9%. Remember, the payments will be received at the beginning of each year (annuity due).

Answer 1

Calculate the present value of the cash flows as follows:

Present value = Future value / (1+rate)^years

Present value = $1000/(1+7%)^6 +  $2000/(1+7%)^9

Present value = $1000*0.666342 + $2000*0.543934

Present value = $1,754.21

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Calculate the present value of annuity due as follows:

Present value is $1,412.52.