Question

Matt is considering the purchase of an investment that w ill pay him $12,500 in 12 years. If Matt wants to earn a return equal to 7 percent per year (annual compounding), what is the maximum amount he should be w illing to pay for the investment today?

Answer 1

The correct answer is $5,550.15.

Step-by-step explanation:

According to the scenario, the given data are as follows:

Future value (FV) = $12,500

Time period (n) = 12 years

Rate of interest (r) = 7%

So, we can calculate the present value that should be invested by using following formula:

FV = PV ( 1 + r)^n

So, by putting the value, we get

$12,500 = PV ( 1 + 0.07)^12

$12,500 = PV (2.25219158896)

PV = $12,500 ÷ 2.25219158896

PV = $5,550.14949051122 = $5,550.15

Hence, the present value that should be invested is $5,550.15.