Sasha owns two investments, A and B, that have a combined total value of 30,400

Question

Sasha owns two investments, A and B, that have a combined total value of 30,400 dollars. Investment A is expected to pay 25,300 dollars in 7 year(s) from today and has an expected return of 7.7 percent per year. Investment B is expected to pay 22,374 dollars in T years from today and has an expected return of 4.74 percent per year. What is T, the number of years from today that investment B is expected to pay 22,374 dollars? Round your answer to 2 decimal places (for example, 2.89, 14.70, or 6.00).

Explanation / Answer

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

A:

Present value=25300/1.077^7

=(25300*0.594963162)

=$15052.568

Hence present value of B=($30400-$15052.568)=$15347.432

Hence present value of B=22374/1.0474^n[where n=number of years]

15347.432=22374/1.0474^n

1.0474^n=(22374/15347.432)

Taking log on both sides;

n*log 1.0474=log(22374/15347.432)

n=log(22374/15347.432)/log 1.0474

Hence T=8.14 years(Approx).

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