Question

Jorge is considering an investment that will pay $4,650 a year for five years, starting one year from today. What is the maximum amount he should pay for this investment if he desires a rate of return of 9.0 percent?

Answer 1

Answer:

He should pay $18,086.88 for the investment.

Explanation:

Giving the following information:

Yearly cash flow= $4,650

Number of years= 5

Rate of return= 9%

To determine the price to pay for the investment, we need to determine the present value of the cash flow.

First, we need to calculate the final value using the following formula:

FV= {A*[(1+i)^n-1]}/i

A= annual cash flow= 4,650

i= 0.09

n= 5

FV= {4,650*[(1.09^5)-1] / 0.09}

FV= $27,828.90

Finally, the present value:

PV= FV/ (1+i)^n

PV= 27,828.90/ 1.09^5

PV= $18,086.88

He should pay $18,086.88 for the investment.