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An investment is expected to generate $2,000,000 each year for five years. If the firm's cost of...

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An investment is expected to generate $2,000,000 each year for five years. If the firm's cost of funds is 5%, what is the maximum amount of the firm should pay for the investment?

Present value of a constant stream of cash flows:

The present value of a constant stream of cash flows is the present value of all the cash flows to be received in future discounted back to present or year 0 at a given rate. Higher the rate, lower is the present value.

Answer and Explanation: 1

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We can calculate this value using Present Value of the annuity formula:

Present value of annuity can be calculated by the given formula:

{eq}PV=...

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How to Find the Value of an Annuity

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Chapter 21 / Lesson 15
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An annuity is a type of savings account that pays back the investor in the future. Learn the formula used to calculate an annuity's value, and understand the importance of labeling specific numbers to calculate an output over time.


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