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Walt i evaluating an invetment that will provide the following return at the end of each
of the following year: year 1, $12,500; year 2, $10,000; year 3, $7,500; year 4, $5,000; year 5,
$2,500; year 6, $0; and year 7, $12,500. Walt believe that he hould earn an annual rate of 9
percent on thi invetment. How much hould he pay for thi invetment?



Answer :

sqdancefan

Answer:

  $37,680.95

Step-by-step explanation:

You want the value of an investment earning a 9% rate of return, given that it pays $12500, 10000, 7500, 5000, 2500, 0, and 12500 at the end of each of the following 7 years.

Present value

The present value of the series of payments is conveniently calculated by a spreadsheet formula. The attachment shows the result.

The present value of any given payment is given by ...

  PV = P(1.09^-t)

where PV is the present value of payment P received after t years. The 1.09 represents the expected earnings of 9% on the value.

The present value of the series of payments is the sum of the present values of each of them.

The investment is worth $37,680.95.

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Additional comment

The spreadsheet formula used is =NPV(9%, [range of payment data]), where [range of payment data] refers to the cells containing the 7 payments.

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