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.
