Final answer:
The present value of an investment opportunity that offers $910 annual payments for 12 years at a 6% required rate of return is calculated using the present value of an ordinary annuity formula. This value represents the maximum amount an investor should be willing to pay today for the investment.
Step-by-step explanation:
The question asks us to calculate the present value of an investment opportunity that pays $910 per year for 12 years, with the first payment starting a year from today. The investor requires a rate of return of 6.0 percent.
To calculate the present value of this annuity, we can use the formula for the present value of an ordinary annuity:
Present Value = Pmt × [(1 - (1 + r)^-n) / r]
Where:
- Pmt is the annual payment ($910)
- r is the annual discount rate (6.0% or 0.06)
- n is the number of periods (12 years)
Using the formula, we get:
Present Value = $910 × [(1 - (1 + 0.06)^-12) / 0.06]
Crunching these numbers, we can determine the present value of the investment opportunity, which reflects the maximum amount the investor should pay today for this stream of future payments.
Important Note:
- Present Value
- Discount Rate
- Rate of Return