How much would an investor be willing to pay today for an investment that returns $1,000 every year at year-end for five years if he wants to earn a 10% annual return on the investment?

Question

Quizplus · Accepted Answer

The investor wants to earn a 10% annual return on the investment, so we can use the formula: Present value = Annual payment / Discount rate. 
Discount rate = 10%, Annual payment = $1,000 for five years. 
Using the formula, we get: $1,000 / (1 + 0.10)^1 + $1,000 / (1 + 0.10)^2 + $1,000 / (1 + 0.10)^3 + $1,000 / (1 + 0.10)^4 + $1,000 / (1 + 0.10)^5 = $3,791. Therefore, the investor would be willing to pay $3,791 today to earn a 10% annual return on the investment.

How Much Would an Investor Be Willing to Pay Today