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Homework answers / question archive / Danny owns two investments, A and B, that have a combined total value of $25,000
Danny owns two investments, A and B, that have a combined total value of $25,000. Investment A is expected to pay $25,000 in 4 years from today and has an expected return of 12 percent per year. Investment B is expected to pay X in 7 years from today and has an expected return of 8 percent per year. What is X, the cash flow expected from investment B in 7 years from today?
First we calculate Present Value of Investment A:
Present Value = Future Value / (1 + Expected Return)^ Number of Periods
= $25,000 / (1 + 12%)^4
Present value = $15,887.95
The amount in Investment A today = $15,887.95
Investment B value today = Today Investment - Amount in Investment A today
= $25,000 - $15,887.95
Investment B value today = $9,112.05
Investment B has a expected return = 8%
Now We Calculate the Value X, the cash flow expected from investment B in 7 years from today:
Future Value = Present Value * (1 + Expected Return)^Number of Periods
= $9,112.05 * (1 + 8%)^7
Future value = $15,616.45
So, Value X, the cash flow expected from investment B in 7 years from today is $15,616.45
