An investment, which is worth 12,500 dollars and has an expected return of 10.96 percent, is expected to pay fixed annual cash flows for a given amount of time. The first annual cash flow is expected in 1 year from today and the last annual cash flow is expected in 7 years from today. What is the present value of the annual cash flow that is expected in 2 years from today?
Ans: Cash flow that is expected in 2 years from today = $ 12,500 * 10.96 %
= $ 1,370
Present value of cash flow that is expected in 2 years = $ 1,370 * 1/(1+r)n
= $ 1,370 * 1/(1+10.96%)2
= $ 1370 * 1 /(1.1096)2
= $ 1,370 * 0.90122
= 1234.679
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