An investment pays $2,000 per year for the first 4 years, $4,000 per year for th

ID: 2738730 • Letter: A

Question

An investment pays $2,000 per year for the first 4 years, $4,000 per year for the next 4 years, and $6,000 per year the following 10 years (all payments are at the end of each year). If the discount rate is 11.25% compounding quarterly, what is the fair price of this investment? Work with 4 decimal places and round your answer to two decimal places. For example, if your answer is $345.667 round as 345.67 and if your answer is .05718 or 5.718% round as 5.72.

Available answers: 31,423.90, 34,229.60, 33,107.32, 28,057.05, 23,287.35

Explanation / Answer

Given 11.25% compounded quarterly.

Therefore effective interest rate per annum = [1 + 11.75/4] ^ 4 – 1 = 11.7336%

Years

Amount $

PVAF @ 11.7336%

Product

1-4 ( 4 yrs)

2000

3.0545

6109.00

5-8 ( 4 yrs)

4000

1.9597

7838.80

8-18 ( 10 yrs)

6000

2.3515

14109.00

Total

28056.80

Therefore fair price of investment = 28057.05 (approximately)