Question

You are offered an investment that pays $150 in 3 years, $250 in 4 years, and $1010 in 10 years. You can borrow/invest at 6.6% per year. If you were offered a price of $845 for this investment, would you accept?

Answer 1

PV and FV are related as:

PV = FV/ (1+r) n

r is required rate and n is the numbers of period.

We can compute present value of three payments as:

PV = $ 150/ (1+0.066)3 + $ 250/ (1+0.066)4 + $ 1,010/ (1+0.066)10    

    = $ 150/ (1.066)3 + $ 250/ (1.066)4 + $ 1,010/ (1.066)10    

    = $ 150/ 1.211355496 + $ 250/ 1.291304958736 + $ 1,010/ 1.89483783075896

      = $ 123.828224245742 + $ 193.602602010228 + $ 533.027145439381

    = $ 850.457971695352 or $ 850.46

$ 845 can not be accepted as present value of all three cash payments is $ 850.46