You are given an investment to analyze. The cash flows from this investment are End of year: 1 =...

Question:

You are given an investment to analyze. The cash flows from this investment are End of year:

1 = $5,190

2 = $2,020

3 = $25,360

4 = $6,040

5 = $3,900

What is the present value of this investment if 15 percent per year is the appropriate discount rate?

Present Value:

In calculating the present value of an investment, we use the concept of time value of money. Present value of an investment is the future cash flows of an investment discounted back to the present time at the prevailing discounting rate.

Answer and Explanation:

The formula that is used in discounting an investment is ;

{eq}PV = A (1+r ) ^{-n} {/eq}

where:

  • A = Amount
  • PV = Present Value
  • r =Interest rate
  • n = Period

Therefore,

{eq}PV= $5,190(1+0.15)^{-1} + $2,020(1+0.15)^{-2} + $25,360(1+0.15)^{-3} + $6,040(1+0.15)^{-4} + $3,900(1+0.15)^{-5} = $28,107.44 {/eq}


Learn more about this topic:

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How to Calculate Present Value of an Investment: Formula & Examples

from Introduction to Business: Homework Help Resource

Chapter 24 / Lesson 15
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