Question

SHOW WORK ON EXCEL: You are considering an investment that will pay you $12,000 the first year, $13,000 the second year, $17,000 the third year, $19,000 the fourth year, $23,000 the fifth year, and $28,000 the sixth year (all payments are at the end of each year). What is the maximum you would be willing to pay for this investment if your opportunity cost is 11%?

Answer 1

the maximum you would be willing to pay for this investment is nothing but present value of future expected cash flows

Year	Cashflow	PVF@11%	Cashflow*PVF
1	12,000	0.9009	10810.81
2	13,000	0.8116	10551.09
3	17,000	0.7312	12430.25
4	19,000	0.6587	12515.89
5	23,000	0.5935	13649.38
6	28,000	0.5346	14969.94

Present Value = Cashflow*PVF

= 10810.81+10551.09+12430.25+12515.89+13649.38+14969.94

= $74927.37

Formula to calculate PV in excel is as follows

"=PV(interest rate,Year,0,cashflow)"

You can use the equation 1/(1+i)^n to find PVF using calculator