An investment offers $10,000 per year for 15 years, with the first payment occur
ID: 2645433 • Letter: A
Question
An investment offers $10,000 per year for 15 years, with the first payment occurring 1 year from now. Assume the required return is 12 percent.
What is the value of the investment today? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
What would the value be if the payments occurred for 40 years? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
What would the value be if the payments occurred for 75 years? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
What would the value be if the payments occurred forever? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Requirement 2:What would the value be if the payments occurred for 40 years? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Requirement 3:What would the value be if the payments occurred for 75 years? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Requirement 4:What would the value be if the payments occurred forever? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Explanation / Answer
PV at 1st year = 10,000/(1.12)^1. PV at 2nd year = 10,000/(1.12)^2
Formula used: PV = amount/(discount rate^time from point zero)
Using this formula on spreadsheet i have calculated the PV as given below:
If for 40 years, then PV will be:
If for 75 years:
If payments occured forever, then it will be perpetuity. PV of perpetuity = investment amount/rate
= 10,000/0.12 = 83,333.33
Year Amount Discount factor PV 1 10,000 1.12 8,928.57 2 10,000 1.12 7,971.94 3 10,000 1.12 7,117.80 4 10,000 1.12 6,355.18 5 10,000 1.12 5,674.27 6 10,000 1.12 5,066.31 7 10,000 1.12 4,523.49 8 10,000 1.12 4,038.83 9 10,000 1.12 3,606.10 10 10,000 1.12 3,219.73 11 10,000 1.12 2,874.76 12 10,000 1.12 2,566.75 13 10,000 1.12 2,291.74 14 10,000 1.12 2,046.20 15 10,000 1.12 1,826.96 Total PV 68,108.64Related Questions
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