Question

An investor can make an investment in a real estate development and receive an expected cash return of $45,000 at the end of six years. Based on a careful study of other investment alternatives, she believes that a 9 percent annual return compounded quarterly is a reasonable return to earn on this investment. How much should she pay for it today?

Answer 1

To calculate the present value of the investment, use the formula for present value of a future amount compounded quarterly.

Step-by-step explanation:

To calculate the present value of an investment that will yield a future cash return, you can use the formula for present value of a future amount compounded quarterly. The formula is:

Present Value = Future Value / (1 + (r/n))^(n*t)

Where:

Future Value = $45,000 (the expected cash return)

r = 9% (annual interest rate)

n = 4 (number of compounding periods per year)

t = 6 (number of years)

Substituting the values into the formula, we get:

Present Value = $45,000 / (1 + (0.09/4))^(4*6)

After calculating, the present value of the investment is approximately $32,610.83.

Answer 2

FV= 45,000

I= 9/4=2.25

N=6*4=24

PMT=0

PV=?

Put these in financial calculator

$26,381 is what she should pay for the investment today.

Step-by-step explanation: