Question

How much would you pay today for an asset that pays 6 payments of $1,000 in each year for six years, starting seven years from now, assuming the interest rate is 4% (compounded annually)?

$4,143

$3,984

$5,242

$3,871

Answer 1

Answer :- $ 4143

Calculation:-

As given we will calculate present value of all the payments we received. As we are receiving first payment in 7th year, so we start discount it by 7 for next 6 years.

Present Value = Future Value / (1 + rate )n

= 1000 / ( 1.04 )7 + 1000 / ( 1.04 )8 + 1000 / ( 1.04 )9​​​​​​​ + 1000 / ( 1.04 )10​​​​​​​ + 1000 / ( 1.04 )11​​​​​​​ + 1000 / ( 1.04 )12​​​​​​​

= 1000 / 1.3160 + 1000 / 1.3686 + 1000 / 1.4233 + 1000 / 1.4802 + 1000 / 1.5394 + 1000 / 1.6010

= 759.88 + 730.67 + 702.59 + 675.58 + 649.60 + 624.61

   = 4142.93 or ​​​​​​​4143