Question

An investment offers $7130 per year for 25 years, with the first payment occurring one year from now. If the required return is 7.4 percent, what is the value of the investment?

Answer 1

Solution:
	Present value of annuity = Value of the investment=$80,179.83
Working Notes:
	Present value of annuity = Px[ 1-1 /(1 + i)^n)]/ i
	P=Annual amounts = $7,130
	I= interest rate per period = 7.4%
	n= no. Of period = 25 years
	PV of annuity= ??
	present value of annuity = Px[ 1-1 /(1 + i)^n)]/ i
	= 7130 x (1-1/(1+7.4%)^25)/7.4%
	=7130 x 11.24541849
	= 80179.83382
	=$80,179.83
Notes:	Value of investment is the present value of all cash flow during the life of investment.
Please feel free to ask if anything about above solution in comment section of the question.