Question

An investment promises to return $8,000 at the end of each of the next eight years and then $3,000 at the end of each of the remaining seven years (years 9 through 15). What is the value of this investment today at a 9 percent interest rate?

Answer 1

The Value of Investment today

The Value of Investment today is the present value of future cash inflows discounted at 9% interest rate

Year	Annual Cash Inflow ($)	Present Value factor at 9%	Present Value of Annual Cash Flow ($)
1	8,000	0.9174312	7,339.45
2	8,000	0.8416800	6,733.44
3	8,000	0.7721835	6,177.47
4	8,000	0.7084252	5,667.40
5	8,000	0.6499314	5,199.45
6	8,000	0.5962673	4,770.14
7	8,000	0.5470342	4,376.27
8	8,000	0.5018663	4,014.93
9	3,000	0.4604278	1,381.28
10	3,000	0.4224108	1,267.23
11	3,000	0.3875329	1,162.60
12	3,000	0.3555347	1,066.60
13	3,000	0.3261786	978.54
14	3,000	0.2992465	897.74
15	3,000	0.2745380	823.61
TOTAL			51,856.16

“Hence, the Value of Investment today will be $51,856.16”

NOTE

The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.