Question

You have decided to invest in a new business venture that will likely to pay you $800 at the end of each month for the next 10 years. You believe that a reasonable rate of return on your investment should be an annual rate of 12% compounded monthly. How much should you pay for the investment

Answer 1

Answer:

PV= $55,760.42

Explanation:

Giving the following information:

Monthly payment= $800

Number of periods= 10*12= 120

Interest rate= 0.12/12= 0.01

The investment is worth its present value.

First, we will calculate the future value and the present value.

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

A= monthly payment

FV= {800*[(1.01^120) - 1]} / 0.01

FV= $184,030.95

Now, the present value:

PV= FV/(1+i)^n

PV= 184,030.95 / (1.01^120)

PV= $55,760.42