Question

A 6-year investment will pay $1,500 at the end of this year, and the payments will grow at a rate of 3% per year. The required return is 10%. What is the present value of this investment?

Answer 1

The sum of payments must equal 110% of initial investment or present value.


`1500(1+r+r^2...+r^5) = 1.1 PV \\ \\ 1500((r^6 -1)/(r-1)) = 1.1 PV`
where r = 1.03
Subbing in 1.03 for r and solving for PV:

PV = 8820.56