Problem
An investor will receive $365 at the end of each year for thirteen years. The first payment will be received four years from now. Given that the interest rate is 3%, the present value of this cash flow stream is closest to:
$3,552 (Correct solution)
$3,882
$3,449 (I answered this)
Solution
- N = 13
- PMT = 365
- I/Y = 3
- Compute PV: PV = $3881.76
This is the value of the cash flow stream three years from now. We must discount this value back to t = 0 to compute its present value.
- N = 3
- I/Y = 3
FV = -3,881.76.
- Compute PV: PV = 3552.36
Question
Why is N = 3 in the bottom half of the solution? I used N = 4 because the initial payment is 4 years from now, resulting in answer C instead. Any clarification on this? Thank you very much!