Question

An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn 8% annually, what is this investment’s present value? Its future value? Ehrhardt, Michael C.. Corporate Finance: A Focused Approach (MindTap Course List) (p. 186). Cengage Learning. Kindle Edition.

Answer 1

Answer:

$923.98 and $1,466.58

Explanation:

The computation of the present value is shown below:

Year Cash flows Discount rate 8% PV of cash inflows  

1          $100         0.9259259259 $92.59

2          $100         0.8573388203 $85.73

3          $100         0.793832241         $79.38

4         $200         0.7350298528 $147.01

5         $300         0.680583197         $204.17

6         $500         0.6301696269 $315.08

Present value                             $923.98

Now the

Future value = Present value × (1 + rate)^number of years

where,

Present value = $923.98

Rate = 8%

Number of years = 6 years

So, the future value

= $923.98 × (1 + 8%)^6

= $1,466.58