Question

An investment will provide returns in the amount of $5,000, $7,000, $9,000, and $12,000 at the end of first, second, third, and fourth year, respectively. How much should you pay for this investment if you want to earn a 10% return compounded monthly on the same?

Answer 1

First Year = $5,000

second Year = $7,000

third Year = $9,000

fourth year = $12,000

return = 10%(compounded monthly) r = 10 / 100*12 = 0.008333

PV = FV / (1+r)ⁿ

How much should you pay for this investment

First Year = $5,000

PV =5,000/ (1+0.008333)^1*12 = 4,526.06

second Year = $7,000

PV = 7,000 / (1+0.008333)^2*12 =5,735.87

third Year = $9,000

PV = 9,000/ (1+0.008333)^3*12 = 6,675.66

fourth year = $12,000

PV = 12,000/ (1+0.008333)^4*12 = 8,057.18

pay for this investment = 4,526.06+5,735.87+6,675.66+8,057.18

   = 24,994.77