Question

An investment will pay you $50,000 in 5 years plus $8,000 every year for 10 years. If you can earn 9.4% on your money, how much would you be willing to pay for this investment?

Answer 1

PVOrdinary Annuity = C*[(1-(1+i/100)^(-n))/(i/100)]

C = Cash flow per period

i = interest rate

n = number of payments

PV= 8000*((1-(1+ 9.4/100)^-10)/(9.4/100))

PV = 50449.55

Using Calculator: press buttons "2ND"+"FV" then assign

PMT =8000

I/Y =9.4

N =10

FV = 0

CPT PV

Using Excel

=PV(rate,nper,pmt,FV,type)

=PV(9.4/(100),10,,PV,)

Future value = present value*(1+ rate)^time

50000 = Present value*(1+0.094)^5

Present value = 31906.81

Using Calculator: press buttons "2ND"+"FV" then assign

FV =-50000

I/Y =9.4

N =5

PMT = 0

CPT PV

Using Excel

=PV(rate,nper,pmt,FV,type)

=PV(0.094,5,,50000,)

Total = 50449.55+31906.81

=

82356.36