Approximately how much would you currently pay for an investment at a discount rate of 11% p.a. which produces an end of year cash inflow of $160 each year for 3 years?

Question

Quizplus · Accepted Answer

To calculate the present value of the cash inflows, we need to use the present value formula:

PV = CF1/(1+r)^1 + CF2/(1+r)^2 + CF3/(1+r)^3

Where PV is the present value, CF is the cash flow, r is the discount rate, and the subscripts denote the different years.

Plugging in the given values, we get:

PV = 160/(1+0.11)^1 + 160/(1+0.11)^2 + 160/(1+0.11)^3
PV = 136.04 + 115.17 + 97.43
PV = 348.64

Therefore, the investment would cost approximately $391 at a discount rate of 11% p.a.

Approximately How Much Would You Currently Pay for an Investment