Question

An investment offers $5,500 per year for 15 years, with the first payment occurring one year from today.

If the required return is 6%, what is the present value of the investment?

Answer 1

To Calculate the Present Value of this investment we need to calculate the present values of Cash flows using the below formula =

Present value = Cash Flow x 1/(1+R)^n where R is the discount rate and n is the no. of years.

Now let us plot the cash flows of the investmnet and compute the present values of each cash flow

Years	Cash Flow (A)	Discount Factors (B)	Derivation of Discount Factors (B)	Present Value of Cash Flows (AxB)
1	5500	0.9434	=1/1.06^1	5,188.68
2	5500	0.8900	=1/1.06^2	4,894.98
3	5500	0.8396	=1/1.06^3	4,617.91
4	5500	0.7921	=1/1.06^4	4,356.52
5	5500	0.7473	=1/1.06^5	4,109.92
6	5500	0.7050	=1/1.06^6	3,877.28
7	5500	0.6651	=1/1.06^7	3,657.81
8	5500	0.6274	=1/1.06^8	3,450.77
9	5500	0.5919	=1/1.06^9	3,255.44
10	5500	0.5584	=1/1.06^10	3,071.17
11	5500	0.5268	=1/1.06^11	2,897.33
12	5500	0.4970	=1/1.06^12	2,733.33
13	5500	0.4688	=1/1.06^13	2,578.61
14	5500	0.4423	=1/1.06^14	2,432.66
15	5500	0.4173	=1/1.06^15	2,294.96

The total Present Values as mentioned above would give us our required Present Value of Investment = $ 53417.37