Calculating Present Value of an Investment with Fixed Payment

12 Dec 2023

How do we calculate the present value of an investment with fixed payment?

Based on the given data, what is the formula to determine the present value of an investment that will pay a fixed amount each year?

The present value of an investment with a fixed payment can be calculated using the formula for the present value of an ordinary annuity:

Explanation:

To calculate the present value of an investment with a fixed payment, we can use the formula:

PV = PMT * (1 - (1 + r)^(-n)) / r

Where PV is the present value, PMT is the payment amount, r is the interest rate per period, and n is the number of periods.

In the given example, the investment pays $382 every year, with an interest rate of 8% per year.

We need to find the present value for one year, so we plug in the values into the formula:

PV = $382 * (1 - (1 + 0.08)^(-1)) / 0.08

After simplifying the equation, we get:

PV = $354.01

Therefore, the present value of the investment that will pay $382 every year is $354.01.