Question

Suppose, you are evaluating an investment which will earn you $12,500, $10,000, $7,500, $5,000, and $0 at the end of first, second, third, fourth, and fifth year, respectively. How much should you pay for this investment if you expect to earn an annual return of 5% compounded monthly

Answer 1

Total PV= $31,448.87

Step-by-step explanation:

Giving the following information:

Cash flows:

Cf1= $12,500

Cf2= $10,000

Cf3= $7,500

Cf4= $5,000

Cf5= $0

Rate of return= 0.05/12= 0.0042

To calculate the present value of the investment, we need to use the following formula on each cash flow:

PV= FV/(1+i)^n

Cf1= 12,500/ (1.0042^12)= 11,886.87

Cf2= 10,000/(1.0042^24)= 9,043.05

Cf3= 7,500/(1.0042^36)= 6,449.61

Cf4= 5,000/(1.0042^48)= 4,069.34

Cf5= $0

Total PV= $31,448.87