Homework Help is Here – Start Your Trial Now!
Business
Finance
Solve for the Present Value.

Solve for the Present Value.

Essentials Of Investments
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
Problem 1PS
See similar textbooks
icon
Related questions
Question
4000 3000 2500 2000 1500 1000 500 0 ARITHMETICI $0.00 Solve for the Present Value. • N = Years $1,500 i= 2.3% 52,000 $3,000 $2,500 ill 4 Senesi Series2 5 $3,500 6
Transcribed Image Text:4000 3000 2500 2000 1500 1000 500 0 ARITHMETICI $0.00 Solve for the Present Value. • N = Years $1,500 i= 2.3% 52,000 $3,000 $2,500 ill 4 Senesi Series2 5 $3,500 6
Expert Solution
Step 1: Introduction

We can determine the PV of the cash stream using the formula below:

P V space equals space sum from blank to blank of fraction numerator C F subscript n over denominator left parenthesis 1 plus r right parenthesis to the power of n end fraction

In the formula above CFn = Cash flow at year n
r = annual interest rate =2.3%
n = year in which cash flow occured

Alternatively we can determine the PV of cash flow using the PV of arthimetic annuity formula as below:

table row cell P V thin space end cell equals cell space P M T space cross times a n space plus space Q cross times fraction numerator a n minus n v to the power of n over denominator i end fraction end cell row cell a n space end cell equals cell space fraction numerator 1 minus left parenthesis 1 plus r right parenthesis to the power of negative n end exponent over denominator r end fraction end cell row blank equals cell space fraction numerator 1 minus 1.023 to the power of negative 5 end exponent over denominator 0.023 end fraction end cell row blank equals cell space 4.67269727 end cell row cell n v to the power of n space end cell equals cell space 5 cross times open square brackets fraction numerator 1 over denominator 1 plus 0.023 end fraction close square brackets to the power of 5 end cell row blank equals cell space 5 cross times 0.89252796 end cell row blank equals cell space 4.46263981 end cell end table

In the formula above PMT = first payment in year 2 = 1500
q = arthmetic increase = $500
n = number of payments = 5 

The formula above determines the PV of cash inflows at year 1. We need to discount this again by 1 year by dividing the value by (1+r)

steps

Step by step

Solved in 3 steps with 4 images

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Future Value
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS