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31 October, 10:31

An investor has an opportunity to purchase an investment that will provide $11,000 at the end of three years, and $50,000 at the end of five years. If the property is expected to be sold at the end of the sixth year for $100,000 and the investor requires a 12% rate of return, what amount should he or she pay for the investment today? a. $161,000 b. $50,663 c. $81,568 d. $86,864

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  1. 31 October, 13:07
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    Option (d) $86,864

    Explanation:

    Present value = Cash flow * Discounting factor

    Here,

    Discounting factor = (1 + r) ⁻ⁿ

    n = the year of cash flow

    r = discount rate = 12%

    Year (n) Cash flow Discount factor Present Value

    3 $11,000 0.71178 $7,830

    5 $50,000 0.567427 $28,371

    6 $1,00,000 0.506631 $50,663

    Therefore,

    The amount he or she should pay for the investment today

    = ∑ (Present value)

    = $7,830 + $28,371 + $50,663

    = $86,864

    Hence,

    Option (d) $86,864
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