I was given this question in class.
You have the opportunity to purchase an investment that will pay $2000 at the beginning of each year for three years. You can earn 5% per year on a comparable investment
What is the current value of this investment?
How much will you have at the end of the third year if all cash flows are reinvested at 5%?
The calculations go something like this:
I have trouble understanding discounting future cash flows back to current cash flow. Can someone please explain why the $2000? (ie why did the summation ends at 2 and not 3?)
And also how does the timeline affect the calculations? For example what difference do "beginning" of each year and how much at the "end of the third year" make? What if it is beginning and beginning or end and end?