You are considering the purchase of an investment that would pay you $5,000 per year for Years 1-5, $3,000 per year for Years 6-8, and $2,000 per year for Years 9 and 10. If you require a 14 percent rate of return, and the cash flows occur at the end of each year, then how much should you be willing to pay for this investment?
A) $15,819.27
B) $21,937.26
C) $32,415.85
D) $38,000.00
E) $52,815.71

Question

Quizplus · Accepted Answer

The present value of the cash flows can be calculated using the formula for the present value of an annuity. Calculate the present value for each segment of cash flows separately and sum them up: $5,000 for 5 years, $3,000 for 3 years, and $2,000 for 2 years, all discounted at 14%. The total present value is approximately $21,937.26.

You Are Considering the Purchase of an Investment That Would