Question

Your client is considering an investment that will pay $400 in one year's time, and $400...

Your client is considering an investment that will pay $400 in one year's time, and $400 every year after that. If similar investments offer an annual interest of 5%, how much is this investment opportunity worth today?
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Answer #1

This is an example of a  perpetuity under which a stream of cash flow payments continues indefinitely or is an annuity which has no end. Its present worth can be calculated using the below formula.

since cash flow = 400 and interest rate = 5%

Present value = $400/0.05

= $8000

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