ne value be if the p calculations and r ne value be if the p calculations and re hn ne value be if th

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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**Investment Valuation Problem**

An investment offers $3,850 per year for 15 years, with the first payment occurring one year from now.

### Questions and Calculations:

**a.** If the required return is 6 percent, what is the value of the investment? *(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)*

**b.** What would the value be if the payments occurred for 40 years? *(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)*

**c.** What would the value be if the payments occurred for 75 years? *(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)*

**d.** What would the value be if the payments occurred forever? *(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)*

### Summary of Present Values

| **a.** Present value of 15 annual payments |                           |
|--------------------------------------------|---------------------------|
| **b.** Present value of 40 annual payments |                           |
| **c.** Present value of 75 annual payments |                           |
| **d.** Present value of annual payments forever |                     |

**Explanatory Note on Present Values**

The present value (PV) calculations are essential to determine what a series of future payments is worth in today's terms, considering a specific rate of return (interest rate). In this particular problem, the cash flows ($3,850 per year) and the number of payments (15 years, 40 years, 75 years, and perpetuity) are given, making it a practical exercise for understanding financial valuation. The discount rate (6%) is used to compute these present values. 

Note: When solving present value problems, accuracy is crucial; hence, intermediate calculations should not be rounded until the final step to ensure precision.
Transcribed Image Text:**Investment Valuation Problem** An investment offers $3,850 per year for 15 years, with the first payment occurring one year from now. ### Questions and Calculations: **a.** If the required return is 6 percent, what is the value of the investment? *(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)* **b.** What would the value be if the payments occurred for 40 years? *(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)* **c.** What would the value be if the payments occurred for 75 years? *(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)* **d.** What would the value be if the payments occurred forever? *(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)* ### Summary of Present Values | **a.** Present value of 15 annual payments | | |--------------------------------------------|---------------------------| | **b.** Present value of 40 annual payments | | | **c.** Present value of 75 annual payments | | | **d.** Present value of annual payments forever | | **Explanatory Note on Present Values** The present value (PV) calculations are essential to determine what a series of future payments is worth in today's terms, considering a specific rate of return (interest rate). In this particular problem, the cash flows ($3,850 per year) and the number of payments (15 years, 40 years, 75 years, and perpetuity) are given, making it a practical exercise for understanding financial valuation. The discount rate (6%) is used to compute these present values. Note: When solving present value problems, accuracy is crucial; hence, intermediate calculations should not be rounded until the final step to ensure precision.
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