Final answer:
To calculate the current value of an investment requiring $850 payments for 12 years with an 8% required return, you use the present value of an annuity formula. This calculation provides the maximum amount you should spend for the investment given the time value of money.
Step-by-step explanation:
The question asks to calculate the present value of an investment that requires a series of payments. Specifically, you are asked to determine the value today of an investment that requires you to pay $850 annually for 12 years, given an 8% required rate of return. This is a typical present value of an annuity problem, which can be solved using a formula that accounts for the fact that money has a time value.
To calculate the present value of this annuity, we would use the present value of an annuity formula:
PV = PMT x [(1 - (1 + r)^-n) / r]
Where:
- PV = Present Value of the annuity
- PMT = Annual payment ($850)
- r = Annual interest rate (8% or 0.08)
- n = Number of years (12)
By plugging these values into the formula, we can calculate the present value of the investment. This is the maximum amount you should be willing to pay today to make the series of future payments, given your required rate of return.