On January 1, 2013, you are considering making an investment that will pay three annual payments of $10,000. The first payment is not expected until December 31, 2015. You are eager to earn 3%. What is the present value of the investment on January 1, 2013?
A)$26,662.
B)$27,462.
C)$28,286.
D)$29,135.

Question

Quizplus · Accepted Answer

The present value of the investment is calculated by discounting each of the three $10,000 payments back to January 1, 2013, using the 3% interest rate. The payments occur at the end of 2015, 2016, and 2017, which means they are 3, 4, and 5 years away from the present date. The formula for present value is PV = FV / (1 + r)^n. Calculating each: $10,000 / (1.03)^3 + $10,000 / (1.03)^4 + $10,000 / (1.03)^5 = $26,662.

On January 1, 2013, You Are Considering Making an Investment