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4 December, 06:48

You require an 8% annual return on all investments. You will receive $1,000, $2,000, and $3,000 respectively for the next three years (end of year) on a particular investment. What is the most you would be willing to pay for this investment

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  1. 4 December, 06:49
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    I will pay $5,022 for this Investment.

    Explanation:

    The value of the investment can be determined by calculating the present value of all the relevant cash flows of the investment.

    use Following formula:

    Pv = Fv / (1+r) ^n

    PV of year 1 Cash flow = $1,000 x (1 + 0.08) ^1 = $926

    PV of year 2 Cash flow = $2,000 x (1 + 0.08) ^2 = $1,715

    PV of year 3 Cash flow = $3,000 x (1 + 0.08) ^3 = $2,381

    Total Value of Investment = $926 + $1,715 + $2,381 = $5,022

    I will pay $5,022 for this Investment.
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