NET PRESENT VALUE
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1. If I purchased a new car 12 years from today. At that time, the car will cost $80,000. I currently have $10,000 to invest. What rate of interest must my investment earn so that I can pay for the car?
2.Should you buy a asset that will generate income of $1,200 at the end of each year for eight years? The price of the asset is $6,200 and the annual interest rate is 10 percent.
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Question 1:
In order to pay for the car 12 years from today, if you invested $10,000 now, you would have to achieve an average annual interest rate of 18.9207%. This % amount was derived from the following formula: FV = PV ( 1 + i ) t (the formula for future value is shown in more detail below).
Question 2:
Yes, you should buy the asset as you will have a positive net present value of $201.91.
The formula for present value is shown in more detail below.
These questions are examples of future value ...
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