You require an 8% annual return on all investments. You will receive $1,000, $2,000, and $3,000 respectively for the next three years (end of year) on a particular investment. What is the most you would be willing to pay for this investment

Question

Business

Zaire Bautista

11 March, 13:59

You require an 8% annual return on all investments. You will receive $1,000, $2,000, and $3,000 respectively for the next three years (end of year) on a particular investment. What is the most you would be willing to pay for this investment

+4

Answers (1)

Know the Answer?

Kyler Dean · Answer 1

I will pay $5,022 for this Investment.

Explanation:

The value of the investment can be determined by calculating the present value of all the relevant cash flows of the investment.

use Following formula:

Pv = Fv / (1+r) ^n

PV of year 1 Cash flow = $1,000 x (1 + 0.08) ^1 = $926

PV of year 2 Cash flow = $2,000 x (1 + 0.08) ^2 = $1,715

PV of year 3 Cash flow = $3,000 x (1 + 0.08) ^3 = $2,381

Total Value of Investment = $926 + $1,715 + $2,381 = $5,022

I will pay $5,022 for this Investment.