Question

An investment offers $10,250 per year for 18 years, with the first payment occurring one year from today. If the required return is 8%, what is the present value of the investment?

Answer 1

This is PV of annuity.

The calculation is as below:

Annual payment = A = $10,250

r = rate of interest = 0.08

n = Number of years = 18

PV = (A/r) [1 – (1 + r) ^ (-n)]

      = (10,250/0.08) [1 – (1 + 0.08) ^ (-18)]

      = 128,125 [1 – 1/1.08^18]

      = 128,125 [1 – 1/ 3.99601]

      = 128,125 [1 – 0.250249]

      = 128,125 × 0.749751

      = 96,061.84 (Answer)