What is the value of an investment that pays $44,000 every other year forever, i

Question

What is the value of an investment that pays $44,000 every other year forever, if the first payment occurs one year from today and the discount rate is 18 percent compounded daily? (Use 365 days a year. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Value today $___________

What is the value today if the first payment occurs four years from today? (Use 365 days a year. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Value today $______________

Explanation / Answer

Part A

We have:

Pmt = 44000

R = 18%

We have following formula for PV of perpetuity:

PV= pmt/ R

Pv= 44,000/ 0.18

     = 244,444.44

Part B

Now since, the payment will begin in 4 years, this PV would fall at the end of year 3. Therefore, we need to discount it for 3 years.

PV at year 0 = PV at year 3/ (1+r)^3

                         = 244,444.44 / (1+0.18)^3

                         = 148,776.43

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