Question

An investor has an opportunity to purchase an investment that will provide $11,000 at the end of three years, and $50,000 at the end of five years. If the property is expected to be sold at the end of the sixth year for $100,000 and the investor requires a 12% rate of return, what amount should he or she pay for the investment today?a. $161,000 b. $50,663 c. $81,568 d. $86,864

Answer 1

Answer:

Option (d) $86,864

Explanation:

Present value = Cash flow × Discounting factor

Here,

Discounting factor = ( 1 + r )⁻ⁿ

n = the year of cash flow

r = discount rate = 12%

Year (n)       Cash flow        Discount factor     Present Value

3                  $11,000              0.71178               $7,830  

5                  $50,000              0.567427            $28,371  

6                  $1,00,000           0.506631            $50,663

Therefore,

The amount he or she should pay for the investment today

= ∑(Present value)

= $7,830 + $28,371 + $50,663

= $86,864

Hence,

Option (d) $86,864