Question

Suppose, you are evaluating an investment which will earn you $12,500, $10,000, $7,500, $5,000, and $0 at the end of first, second, third, fourth, and fifth year, respectively. How much should you pay for this investment if you expect to earn an annual return of 5% compounded monthly?

Answer 1

We use the formula:  
A=P(1+r/12)^12n
where   
A=future value
P=present value  
r=rate of interest
n=time period.

12500=P1*(1+0.05/12)^(12*1)

P1=12500/(1+0.05/12)^(12*1)

=12500*0.951328242

=$11891.603

10000=P2*(1+0.05/12)^(12*2)

P2=10000/(1+0.05/12)^(12*2)

=10000*0.905025423

=$9050.25423

7500=P3*(1+0.05/12)^(12*3)

P3=7500/(1+0.05/12)^(12*3)

=7500*0.860976245

=$6457.32184

5000=P4*(1+0.05/12)^(12*4)

P4=5000/(1+0.05/12)^(12*4)

=5000*0.819071017

=$4095.35508

Hence total present value=11891.603+9050.25423+6457.32184+4095.35508

=$31494.53(Approx)