Question

An investment offers $9,200 per year for 17 years, with the first payment occurring one year from now. Assume the required return is 12 percent.

What is the value of the investment today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value            $

What would the value be if the payments occurred for 42 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value            $

What would the value be if the payments occurred for 77 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value            $

What would the value be if the payments occurred forever? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value            $

Answer 1

a.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=9200[1-(1.12)^-17]/0.12

=9200*7.11963049

=$65500.60(Approx).

b.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=9200[1-(1.12)^-42]/0.12

=9200*8.26193932

=$76009.84(Approx).

c.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=9200[1-(1.12)^-77]/0.12

=9200*8.33198116

=$76654.23(Approx).

d.Present value of perpetuity=Annual cash flows/required return

=9200/0.12

=$76666.67(Approx).