Suppose you face the prospect of receiving $1,240 per year for the next 8 years plus an extra $903 payment at the end of 8 years. Determine how much this prospect is worth today if the required rate of return is 12 percent.
Annuity = $1,240 for 8 years
Extra payment = $903 at the end of 8 years
Interest rate = 12 %
Present worth = Annuity x Present value ordinary annuity factor (r%, n) + Extra payment x Present value factor (r%, n)
= 1,240 x Present value ordinary annuity factor (12%, 8) + 903 x Present value factor (12%, 8)
= 1,240 x 4.96764 + 903 x 0.40388
= 6,159.87 + 364.70
= $6,525 (rounded to whole number)
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Suppose you face the prospect of receiving $1,240 per year for the next 8 years plus...