Question

An investment will pay $150 at the end of each of the next 3 years, $250 at the end of Year 4, $300 at the end of Year 5, and $600 at the end of Year 6. If other investments of equal risk earn 12% annually, what is its present value? Its future value? Do not round intermediate calculations. Round your answers to the nearest cent.

Answer 1

Answer:

Year     Cashflow       DF@12%       PV

                 $                                      $

1               150             0.8929       134

2              150             0.7972        120

3              150             0.7118          107

4              250            0.6355        159

5              300            0.5674        170                                                                                   6              600            0.5066       304                                                                                                                                                                                                                                          

                                                      994

Explanation:

In this case, we will discount the cashflow for each year at 12% per annum.  The discount factor can be obtained by using the formula (1 + r)-n. Then, we will multiply the cashflows by the discount factors in order to obtain the present values. All the present values will be added up.