Question

A potential investment is projected to earn you $6,000 in two years, $4,000 in three years, and $2,000 in four years. If the appropriate discount rate is 5%, how do you value this potential investment today?

Answer 1

$10,542.932

Step-by-step explanation:

Data provided in the question:

Earning in 2 years = $6,000

Earning in 3 years = $4,000

Earning in 4 years = $2,000

Discount rate, r = 5%

Now,

Present value potential investment = ∑(Cash flow × Present value Factor)

Present value factor = [ 1 + r]⁻ⁿ

n is the number of year

Thus,

Present value potential investment

= [ $6,000 × 1.05⁻² ] + [ $4000 × 1.05⁻³ ] + [ $2000 × 1.05⁻⁴ ]

= $5,442.177 + $3,455.35 + $1,645.405

= $10,542.932