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Present Value
Jack Hammer invests in stock that will pay dividends of $2.00 at the end of the first year; $2.20 at the end of the second year; and $2.40 at the end of the third year. Also, he believes that at the end of the third year he will be able to sell the stock for #33.00. What is the present value of all future benefits if a discount rate of 11 percent is applied? (round all values to two places to the right of the decimal point.)
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Let p1 = payment at the end of year 1
p2 = payment at the end of year 2 p3 = payment at the end of year 3 d = discount With payments at year end, the formula simplifies to: pv = p1/(1+d) +p2/(1+d)^2+p3/(1+d)^3 This is derived from the standard interest formula fv = pv (1 +r) ^ n where r is the rate per period and n is the number of periods Applying the formula to your problem: pv = 2/(1+.11) + 2.2/(1+.11)^2 + 2.4/(1+.11)^3 + 33/(1+.11)^3 pv = 1.80 + 1.79 + 1.75 + 24.13 pv = 29.47 |
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