What is the maximum amount you would pay for an asset that generates an income of $250,000 at the end of each of five years, if the opportunity cost of using funds is 8 percent? Instructions: Do not round intermediate calculations

To answer this question, we want to use the present value (or 'PV') of a stream of payments equation. Note that the rate of return on the asset must be at least as great as the opportunity cost of using the funds, so we set the rate of return, or 'r', to 0.08. The number of periods, 'n', is 5. This can be a lengthy calculation, but it's relatively simple if you understand the formula. Here's how you do it:

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PV = ∑5n=1Future Paymentn(1+r)nPV = ∑n=15Future Paymentn(1+r)n

PV = 250000(1+0.08)1+250000(1+0.08)2+250000(1+0.08)3+250000(1+0.08)4+250000(1+0.08)5PV = 250000(1+0.08)1+250000(1+0.08)2+250000(1+0.08)3+250000(1+0.08)4+250000(1+0.08)5

PV = 998,177.51PV = 998,177.51

Therefore, the most you are willing to pay for this asset is $998,177.51.