In: Finance
An investment promises to return $8,000 at the end of each of the next eight years and then $3,000 at the end of each of the remaining seven years (years 9 through 15). What is the value of this investment today at a 9 percent interest rate?
The Value of Investment today
The Value of Investment today is the present value of future cash inflows discounted at 9% interest rate
Year |
Annual Cash Inflow ($) |
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.