If the required return is 6 percent, what is the value of the investment? (Do no
ID: 2613506 • 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 $5,900 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
1)
Compute the present value when the payment is $5,900, 15 years and 0.06 interest rate.
Using the excel function.
Present Value = PV(rate, Nper, Pmt, FV) = =PV(0.06,15,-5900,0) = $57,302.
Therefore, the present value is $57,302.
2)
Compute the present value when the payment is $5,900, 40 years and 0.06 interest rate.
Using the excel function.
Present Value = PV(rate, Nper, Pmt, FV) = =PV(0.06,40,-5900,0) = $88,773.
Therefore, the present value is $88,773.
3)
Compute the present value when the payment is $5,900, 75 years and 0.06 interest rate.
Using the excel function.
Present Value = PV(rate, Nper, Pmt, FV) = =PV(0.06,75,-5900,0) = $97,090.
Therefore, the present value is $97,090.
4)
Compute the present value if payments occur forever.
Payment = $5,900.
Interest rate is 0.06
Present value of perpetuity = Payment / Interest = $5,900/0.06 = $98,333.