An investment offers $5,000 per year for 10 years, with the first payment occurring 1 year...

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An investment offers $5,000 per year for 10 years, with the first payment occurring 1 year...

An investment offers $5,000 per year for 10 years, with the first payment occurring 1 year from now. If the required return is 8 percent, what is the value of the investment? What would the value be if the payments occurred forever?

business accounting

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Answer 1

Answer #1

a.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=5000[1-(1.08)^-10]/0.08

=5000*6.7100814

=$33550.41(Approx).

b.Present value of perpetuity=Annual cash flows/required return

=5000/0.08

=$62500

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Answer 2

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