Question

Assuming a discount rate of 7%, how much money should you be willing to pay for an investment that will generate annual cash flows of $12,000 per year for ten years?

Answer 1

The amount that would be willing to pay for the investment will be the present value of the annual cash inflows discounted at 7% for 10 years

Year	Annual Cash Inflow ($)	Present Value factor at 7%	Present Value of Annual Cash Flow ($)
1	12,000	0.934579	11,214.95
2	12,000	0.873439	10,481.26
3	12,000	0.816298	9,795.57
4	12,000	0.762895	9,154.74
5	12,000	0.712986	8,555.83
6	12,000	0.666342	7,996.11
7	12,000	0.622750	7,473.00
8	12,000	0.582009	6,984.11
9	12,000	0.543934	6,527.20
10	12,000	0.508349	6,100.19
TOTAL			84,282.98

“Hence, the Value of Investment today will be $84,282.98”

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.