Question

An investor has an opportunity to purchase an investment that will provide $11,000 at the end of three years, and $50,000 at the end of five years. If the property is expected to be sold at the end of the sixth year for $100,000 and the investor requires a 12% rate of return, what amount should he or she pay for the investment today?a. $161,000 b. $50,663 c. $81,568 d. $86,864

Answer 1

Option (d) $86,864

Step-by-step explanation:

Present value = Cash flow × Discounting factor

Here,

Discounting factor = ( 1 + r )⁻ⁿ

n = the year of cash flow

r = discount rate = 12%

Year (n) Cash flow Discount factor Present Value

3 $11,000 0.71178 $7,830

5 $50,000 0.567427 $28,371

6 $1,00,000 0.506631 $50,663

Therefore,

The amount he or she should pay for the investment today

= ∑(Present value)

= $7,830 + $28,371 + $50,663

= $86,864

Hence,

Option (d) $86,864