If the required return is 6 percent, what is the value of the investment? (Do no
ID: 2383749 • Letter: I
Question
If the required return is 6 percent, what is the value of the investment? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)
What would the value be if the payments occurred for 40 years? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)
What would the value be if the payments occurred for 75 years? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)
What would the value be if the payments occurred forever? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)
An investment offers $6,400 per year for 15 years, with the first payment occurring one year from now.
If the required return is 6 percent, what is the value of the investment? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)
Explanation / Answer
Answer:
Present value of an annuity = Annuity*[{(1+interest rate)no.of periods-1}/interest rate(1+interest rate)no.of periods]
1. Applying the formula for the problem no - 1 - $6,400*[{(1+0.06)15-1}/0.06(1+0.06)15] = $6,400*(1.396/0.144) = $62,133.5
2)for 40 years - $6,400*[{(1+0.06)40-1}/0.06(1+0.06)40] = $6,400*(9.286/0.617) = $96,299.22
3)For 75 years = $6,400*[{(1+0.06)75-1}/0.06(1+0.06)75] = $6400*(78.05/4.74) = $105,308
4) Present value if payment occurs for ever = Annuity/Interest rate = $106,666.67