Question

You are offered an investment that will make three $5,000 payments. The first payment will occur four years from today. The second will occur in five years, and the third will follow in six years. If you can earn 12 percent, what is the future value of the cash flows? What is the most this investment is worth today?

Answer 1

Answer:

what is the future value of the cash flows?

$16,872

What is the most this investment is worth today?

$8548

Explanation:

First Payment

$5000 payment will occur Four year from now

$5000 payment will occur Five year from now

$5000 payment will occur six year from now

Interest rate = 12%

Future value at year 6 = (5000 (1+0.12)^2) + (5000 (1+0.12)^1) + 5000

Future value at year 6 = 6272 + 5600 + 5000 = $16,872

Present value of investment = Future Value / (1+r)^n

Present value of investment = $16,872 / (1+0.12)^6

Present value of investment = $8547.88

Present value of investment = $8548 (Rounded off to nearest whole Number)