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, 2016. You are eager to earn 3%. What is the present value of the investment on January 1, 2013?
A)$28,286.
B)$25,886.
C)$26,662.
D)$27,300.

Question

Quizplus · Accepted Answer

The present value of the investment is calculated by discounting each of the $10,000 payments back to January 1, 2013, using the 3% interest rate. The payments occur at the end of 2016, 2017, and 2018, which means they need to be discounted for 4, 5, and 6 years respectively. The formula for present value is PV = FV / (1 + r)^n. Calculating each payment and summing them gives approximately $25,886.

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