Simple and compound interestBeing able to discount future cash flows using a compound interest rate is a critical skill.What is the present value of an investment that pays you $1,200 in 5 years’ time where annual interest rates are 8% compounded annually?

To calculate the present value of an investment that pays $1,200 in 5 years' time with an annual interest rate of 8% compounded annually, we can use the formula for compound interest.

Step 1: Convert the annual interest rate to a decimal form. In this case, 8% is equivalent to 0.08.

Step 2: Determine the number of compounding periods. Since the interest is compounded annually, the number of compounding periods is equal to the number of years, which is 5 in this case.

Step 3: Use the formula for compound interest to calculate the present value (PV):

PV = FV / (1 + r)^n

Where PV is the present value, FV is the future value, r is the interest rate, and n is the number of compounding periods.

Plugging in the values, we have:

PV = $1,200 / (1 + 0.08)^5

Step 4: Calculate the present value using a calculator or by hand.

PV = $1,200 / (1.08)^5

PV ≈ $925.05

Therefore, the present value of the investment that pays $1,200 in 5 years' time with an annual interest rate of 8$925.05.