How much should you pay for this investment if you wish to earn a 5.75% rate of return?

You are considering an investment which will pay $3,000 a month for 15 years, starting 1 month from today. How much should you pay for this investment if you wish to earn a 5.75% rate of return?

Expert Solution

PV of Annuity:

Annuity is series of cash flows that are deposited/reeived at regular intervals for specific period of time.

PV of Annuity = Cash Flow * [ 1 - [(1+r)^-n]] /r

r - Int rate per Periods

n - No. of Periods

Particulars	Amount
Cash Flow	$ 3,000.00
Int Rate	0.479%
Periods	180

Interest Rate = 5.75 % / 12 = 0.479%

Periods = 15 x 12 = 180

PV of Annuity = Cash Flow * [ 1 - [(1+r)^-n]] /r
= $ 3000 * [ 1 - [(1+0.0048)^-180]] /0.0048
= $ 3000 * [ 1 - [(1.0048)^-180]] /0.0048
= $ 3000 * [ 1 - [0.423]] /0.0048
= $ 3000 * [0.577]] /0.0048
$ 3,61,267.29

Pls do rate, if the answer is correct and comment, if any further assistance is required.

jeff jeffy answered 2 years ago

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