Question

An asset was issued 25 months ago. The asset promised just one cash flow of $16000, to be paid to the owner exactly 6 years from the date that the asset was issued. If the required rate of return on this asset is 15%, then what is its present value? Round your answer to the nearest dollar.

Answer 1

Here we will use the following formula:

PV = FV / (1 + r%)n

where, FV = Future value = $16000, PV = Present value, r = rate of interest = 15%, n= time period.

Total period of the investment is 6 years. Out of these 6 years, time elapsed is 25 months. So, current time period or the time period for which present value needs to be calculated is:

Time period = (12 * 6) - 25 = 72 - 25 = 47 months

Time period (in years) = 47 /12 = 3.9167

Now,putting the values in the above equation, we get,

PV = $16000 / (1 + 15%)3.9167

PV = $16000 / (1 + 0.15)3.9167

PV = $16000 / (1.15)3.9167

PV = $16000 / 1.72876209387

PV = $9255

So, present value is $9255.