An investment offers $3,900 per year for 19 years, with the first payment occurr
ID: 2811730 • Letter: A
Question
An investment offers $3,900 per year for 19 years, with the first payment occurring one year from now. If the required return is 9 percent, the present value of the investment is $ ______________ . If the payments occurred for 39 years, the present value of the investment would be $ __________________ . If the payments occurred for 87 years, the present value of the investment would be $______________ . If the payments last forever, the present value would be $____________ (Do not include the dollar signs ($). Round your answers to 2 decimal places
Explanation / Answer
1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=$3900[1-(1.09)^-19]/0.09
=$3900*8.950114779
=$34905.45(Approx).
2.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=$3900[1-(1.09)^-39]/0.09
=$3900*10.72552261
=$41829.54(Approx).
3.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=$3900[1-(1.09)^-87]/0.09
=$3900*11.1049501
=$43309.31(Approx).
4.Present value of perpetuity=annual cash flows/interest rate
=$3900/0.09
=$43,333.33(Approx)
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