To calculate the present value of an annuity, we can use the formula:
PV = PMT * (1 - (1 + r)^-n) / r
Where:
PV = Present Value (initial investment)
PMT = Payment (cash flow received each year)
r = Interest rate (cost of capital)
n = Number of periods (years)
Given:
Initial investment (PV) = $500,000
Payment per year (PMT) = $200,000
Interest rate (r) = 15% or 0.15
Number of periods (n) = 4 years
Using the formula, we can calculate the present value:
PV = $200,000 * (1 - (1 + 0.15)^-4) / 0.15
PV = $200,000 * (1 - (1.15)^-4) / 0.15
PV = $200,000 * (1 - 0.50840) / 0.15
PV = $200,000 * 0.49160 / 0.15
PV = $982,320
Therefore, to receive $200,000 at the end of each year for 4 years with a cost of capital of 15%, the present value of this investment would be approximately $982,320.
Invest 500000 today and get 200000 at the end of each year for 4 years if cost of capital is 15%
1 answer
1 answer