Question

Solve for the Present Value of a Lump Sum with the Following Situation: Investor has been offered an investment opportunity that is expected to provide $1,300 cash inflow at the end of five years. Investor is able to make 5% compounded annually on other investments. (This 5% discount rate can be thought of as an opportunity cost of capitalthe return the investor is forgoing on an alternative investment of equal risk). How much can the investor pay today for this future lump sum receipt and earn a 5% return?

Solve for the Present Value of a Lump Sum with the following Situation: Investor has been offered an investment opportunity that is expected to provide $1,300 cash inflow at the end of five years. Investor is able to make 5% compounded annually on other investments. (This 5% discount rate can be thought of as an opportunity cost of capital-the return the investor is forgoing on an alternative investment of equal risk). How much can the investor pay today for this future lump sum receipt and earn a 5% return? $1,018.58 O $1,000.23 O $970.08 $971.44

Answer 1

Expected Future Value (FV) : $ 1300

Rate of Interest (RATE): 5% and the Tenure of the investment (NPER) = 5 years; Nature: Annual compounding

Present Value using Excel = PV(RATE%,NPER,,-PV,0) = PV(5%,5,,-1300,0) = $ 1018.58

Hence, if the investor invests $ 1018.58 today, it shall deliver 5% Return with annual compounding and the expected value of $ 1300 in lumpsum.