Assume that you have the opportunity to receive $5,000 at the end of each of the next five years.Given an interest rate of 6%,how much would you be willing to pay for this investment today?
A)$22,326
B)$21,062
C)$19,587
D)$3,736

Question

Quizplus · Accepted Answer

We can use the formula for Present Value of an Annuity to calculate the amount we are willing to pay today.

PV = C * [(1 - (1 + r)^-n) / r]

where PV is the present value, C is the amount received each year, r is the interest rate, and n is the number of periods.

Plugging in the values, we get:

PV = 5000 * [(1 - (1 + 0.06)^-5) / 0.06]
PV = $21,062.

Therefore, we are willing to pay $21,062 today to receive $5,000 at the end of each of the next five years, given an interest rate of 6%.

Thus, the best choice is B.

Assume That You Have the Opportunity to Receive $5,000 at the End