If the required return is 6 percent, what is the value of the investment? (Do no
ID: 2724489 • 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
The present value can be calculated with the use of PV function/formula of EXCEL/Financial Calculator. The function/formula for PV is PV(Rate,Nper,PMT,FV) where Rate = Interest Rate, Nper = Period, PMT = Payment and FV = Future Value (if any).
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Part 1)
Here, Rate = 6%, Nper = 15, PMT = $5,900 and FV = 0
Using these values in the above function/formula for PV, we get,
Present Value = PV(6%,15,5900,0) = $57,302.27
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Part 2)
Here, Rate = 6%, Nper = 40, PMT = $5,900 and FV = 0
Using these values in the above function/formula for PV, we get,
Present Value = PV(6%,40,5900,0) = $88,773.15
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Part 3)
Here, Rate = 6%, Nper = 75, PMT = $5,900 and FV = 0
Using these values in the above function/formula for PV, we get,
Present Value = PV(6%,75,5900,0) = $97,089.50
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Part 4)
The present value of a perpetuity can be calculated with the use of following formula:
Present Value = Annual Payment/Rate = 5,900/6% = $98,333.33