You are considering an investment that will pay you $1,000 in one year, $2, mm in two years, and $3,000 in three years. If you want to earn 10% on your money, how much would you be willing to pay?
6. You are considering an investment that will pay you $1,000 in one year, $2,
mm in two years, and $3,000 in three years. If you want to earn 10% on your
money, how much would you be willing to pay?
To calculate the present value of this investment, we need to discount each future cash flow back to its present value using the given rate of 10%. We can use the formula for the present value of an annuity to calculate the present value of the cash flows at the end of year 1 and year 2, and the formula for the present value of a lump sum to calculate the present value of the cash flow at the end of year 3.
PV(year 1) = $1,000 / (1 + 0.1)^1 = $909.09
PV(year 2) = $2,000 / (1 + 0.1)^2 = $1,652.89
PV(year 3) = $3,000 / (1 + 0.1)^3 = $2,487.56
The total present value of the cash flows is the sum of the present values of each cash flow:
Total present value = PV(year 1) + PV(year 2) + PV(year 3) = $909.09 + $1,652.89 + $2,487.56 = $5,049.54
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