An investment pays $400 in one year,X amount of dollars in two years,and $500 in three years. The total present value of all the cash flows (including X)is equal to $1,500. If i is 6 percent,what is X?
A)$702.83
B)$822.41
C)$789.70
D)$749.67
E)$600.00

Question

Quizplus · Accepted Answer

To find X, calculate the present value of each cash flow and set their sum equal to $1,500. The present value of $400 in one year is $400/(1.06), and the present value of $500 in three years is $500/(1.06^3). Subtract these from $1,500 to solve for the present value of X in two years, then solve for X by multiplying by (1.06^2).

An Investment Pays $400 in One Year,X Amount of Dollars