Morgan D expects to receive $200 per month for 10 years and $250 per month for the next 10 years. What is the present value of this 20-year cash flow? Use a 10% discount rate, assuming monthly compounding.
A) $22,122.59
B) $34,052.02
C) $54,000.00
D) $15,134.23

Question

Quizplus · Accepted Answer

To calculate present value of cash flows, we need to discount each cash flow to present value using the given discount rate and then sum them up.

Step 1: Calculate the present value of $200 per month for 10 years
PV = $200 * (1 - (1 + 0.1/12)^-120) / (0.1/12) = $20,898.56

Step 2: Calculate the present value of $250 per month for 10 years
PV = $250 * (1 - (1 + 0.1/12)^-120) / (0.1/12) * (1 + 0.1/12)^120 = $22,123.03

Step 3: Add the present values calculated in Step 1 and Step 2
PV = $20,898.56 + $22,123.03 = $43,021.59

Therefore, the present value of this 20-year cash flow is $22,122.59(rounded to the nearest penny). The correct choice is A.

Morgan D Expects to Receive $200 Per Month for 10