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3 July, 21:51

Matt is considering the purchase of an investment that w ill pay him $12,500 in 12 years. If Matt wants to earn a return equal to 7 percent per year (annual compounding), what is the maximum amount he should be w illing to pay for the investment today?

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  1. 3 July, 22:16
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    The correct answer is $5,550.15.

    Explanation:

    According to the scenario, the given data are as follows:

    Future value (FV) = $12,500

    Time period (n) = 12 years

    Rate of interest (r) = 7%

    So, we can calculate the present value that should be invested by using following formula:

    FV = PV (1 + r) ^n

    So, by putting the value, we get

    $12,500 = PV (1 + 0.07) ^12

    $12,500 = PV (2.25219158896)

    PV = $12,500 : 2.25219158896

    PV = $5,550.14949051122 = $5,550.15

    Hence, the present value that should be invested is $5,550.15.
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