Question

What is the maximum amount you would pay for an asset that generates an income of $250,000 at the end of each of five years, if the opportunity cost of using funds is 8 percent?

Answer 1

To get the maximum amount of this asset we shall use the formula:
A=p(1+r/100)^n
where:
A=future amount
p=principle amount
r=rate
n=time;
from the question: p=$250000, r=8%,n=5
thus;
A=250000(1+5/100)^5
A=250000(1.05)^5
A=$ 319,070.40
Thus, we conclude that at the end of 5 years the amount generated will be $319,070.40